Published On: Mon, Jan 25th, 2016

Peso’s free-fall will correct itself, predicts Mexico’s top banker

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DAVOS, Switzerland — In an interview with The Wall Street Journal at the World Economic Forum in Switzerland, the head of Mexico’s central bank predicted the peso will rise in relation to the U.S. dollar.

Mexico has been unfairly lumped together by investors with other emerging economies, leaving its currency severely undervalued and on course for an upward correction, Agustin Carstens, Mexico’s central bank chief, said in an interview with The Wall Street Journal.

The peso lost 21% of its value against the dollar in the past year, with large losses in the past month alone.

“My sense is that there has been some overreaction in particular in the exchange rate,” Mr. Carstens said on the sidelines of World Economic Forum meetings here. Because its markets are deep and liquid, he noted, investors tend to sell Mexican assets when they want to sell emerging economy assets broadly.

“Through time that pressure tends to disappear,” he said. “That can give place for a major correction, in the case of Mexico for example, which is something I would be expecting.”

The Mexican central banker said he intends to stick by a plan to keep raising short-term interest rates in tandem with U.S. Federal Reserve officials to ensure that investors don’t flee from Mexican financial assets and put further downward pressure on the currency.

“We still need to provide the sense of stability for quite some time,” he said when asked if he intended to continue to follow the Fed’s rate moves.

“We have a lot of capital invested in Mexico and we want it to stay. We need to be aware of it so that is not a destabilizing factor.”

Mexican central banker Agustin Carstens predicts peso's free-fall will correct itself.(PHOTO: eluniversal.com)

Mexican central banker Agustin Carstens predicts peso’s free-fall will correct itself.(PHOTO: eluniversal.com)

The slump in world oil prices this past week sent Mexico’s export crude briefly below $20 a barrel, and led the peso to touch a new low around 18.80 to the U.S. dollar.

When the Fed raised short-term rates in December, Mr. Carstens said, “we couldn’t risk not to respond to it. Mexico is very tightly linked to the U.S. For us it is not that important what other central banks are doing. What the U.S. central bank is doing is really important to us.”

By Jon Hilsenrath for The Wall Street Journal

Source: wsj.com

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