According to Bloomberg.com, Morgan Stanley announced that the likelihood is increasing that Mexico’s central bank will step in to stem the peso’s depreciation as the U.S. moves closer to raising interest rates.
History suggests that policy makers will allow the currency to weaken a further 3 percent before acting, Morgan Stanley strategists including Gordian Kemen in New York wrote in a research note published Monday July 27th. Citigroup Inc. said intervention will probably occur as volatility increases.
One-year price swings in the currency have increased 27 percent this year as signs of a strengthening U.S. economy bolster the case for the Federal Reserve to raise rates, pushing the peso to a record low 16.2669 per dollar on July 24. It gained 0.1 percent to 16.2458 per dollar Monday as of 10:06 a.m. in New York.
“The pace of depreciation over the past 10 to 30 days suggests a higher probability of intervention, particularly if volatility continues to rise,” the Morgan Stanley team said.
The peso has lost 9.2 percent this year, the fourth-worst performance among 24 emerging-market currencies tracked by Bloomberg, as investors speculated that interest-rate increases in the U.S. will raise the dollar’s appeal and lead to capital flight from developing nations. Mexico derives 60 percent of its trade from its northern neighbor.
Any support for the currency from the Banco de Mexico may still have limited impact, the Morgan Stanley analysts said.
“Despite attractive valuations and positive fundamentals, we believe concerns about Fed rate hikes and broader emerging-market foreign-exchange weakness can push dollar-peso higher, with official intervention only moderating volatility and the pace of this move.”
In a Citigroup research note, strategists Kenneth Lam and Dirk Willer said intervention is probable if peso volatility increases and we see “peso-specific” weakness.
“Banxico meeting on Thursday July 30th will likely note foreign-exchange depreciation, albeit not specific to the peso,” they wrote.“ They will likely continue to emphasize their intent to follow the Fed.”
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