Bank of Mexico Sells Dollar to Stem Peso Rout

By Anthony Harrup 

        MEXICO CITY--The Bank of Mexico sold $200 million in an auction Thursday, its first intervention in the exchange market in 2 1/2 years as strong U.S. economic data and the continued slide in oil prices sent the peso to its weakest level since the 2009 crisis.
        The central bank placed the $200 million at an average price of 14.7544 pesos to the dollar. The bank received bids for $251 million.
        The foreign exchange commission, run by the central bank and the Finance Ministry, on Tuesday activated the auctions system, offering $200 million a day at a minimum price that is 1.5% above the previous day's fix. The fix is set by the central bank based on spot market rates.
        The dollar auctions, which have been used in the past in times of financial market volatility, were in place from November 2011 to April 2013, and the last time the central bank sold dollars was in July 2012.
        The peso was quoted in Mexico City at 14.7910 to the dollar following the auction, according to Infosel, compared with 14.5440 at the close Wednesday. The peso is at its weakest level against the dollar since March 2009, at the height of the global financial crisis.
        Concerns about the U.S. Federal Reserve raising interest rates were fueled by an above-estimate increase in U.S. November retail sales, and a drop in weekly jobless claims, both of which suggest strength in the U.S. economy. The continued drop in oil prices Thursday added pressure on the peso, a Mexico City currency trader said. January crude futures fell 99 cents to $59.95 a barrel on the New York Mercantile Exchange, the lowest for a front-month contract in more than five years.
        Crude oil accounts for less than 10% of Mexico's exports, although oil and related taxes make up a significant part of federal government revenue. Mexican export crude priced at $54.40 a barrel on Wednesday, according to state oil company Petróleos Mexicanos.
        The Bank of Mexico auctions are aimed at supplying dollars when authorities consider the peso to be depreciating too quickly.
        "The purpose of the intervention is to prevent a disorderly adjustment. A disorderly adjustment can sometimes unleash destabilization forces that are difficult to control (e.g., capital flight, untamable inflation expectations)," Nomura said in a report.
        Nomura's recommendation last week to sell dollars at 14.20 pesos on expectations that the weakening should reverse course hit a stop-loss this week as the exchange rate broke past 14.50, with a loss on the trade.
        "We failed to recognize that, while the speed of the depreciation was unwarranted given Mexico's fundamentals, the MXN would continue to sell off, responding more to factors such as real money rushing to hedge foreign exchange risk and other market players using USDMXN as way to short emerging markets," Nomura said.
        Write to Anthony Harrup at anthony.harrup@wsj.com
        (END) Dow Jones Newswires

        December 11, 2014 16:59 ET (21:59 GMT)

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