The Mexican Central Bank appears to be selling USD aggressively in Asia today.
Although we do not see these flows ourselves, various media feeds and incoming research are all saying that Banxico is continuing its USD/MXN intervention from last night into Asia. The price action certainly supports this thesis as USD/MXN dropped from 21.4700 to 21.2300 in the space of an hour.
It’s been a tough few days for the Peso as Mexico gets buffeted by Mr Trump’s protectionist rhetoric. The Peso breaking the record lows seen in November and touching 21.6000 seems to have finally forced Banxico’s hand. They intervened heavily in New York overnight selling USD to support the Peso through most of the session.
It is very interesting that they have continued doing so in the Asian session and most unusual. There maybe a couple of reasons for this. Firstly they may be trying to strongly signal their intentions to the market that enough is enough. They most certainly don’t want the Peso to depreciate to such an extent that they are forced to raise interest rates again to protect it as the economy softens.
As central banks in the past have found to their cost, drawing a line in the sand to protect a particular level of your currency is a dangerous game to play. With a free floating currency, this is usually a red rag to a bull for the market. Expect the street to lick its lips and test the resolve of Banxico going forward.
It may also be interpreted in that context as a sign of panic by Mexican officials. The problem with trying to support your currency is that you have to sell foreign reserves against it, thus running them down. In a situation the other way around, a central bank can theoretically create unlimited amounts of its own currency to sell and buy USD for example.
The second reason may be much more straight forward. The USD/MXN is not a liquid currency pair outside of North American trading hours. They should therefore theoretically get much more “bang for their buck” selling in Asia. Why use a hammer to crack a walnut in New York time when that hammer can become a sledgehammer in Asian time.
Banxico would probably prefer the sight of a gnarly Clint Eastwood riding over the horizon towards them then Donald Trump right now. Having been painted as the bad guys by the latter, they must have the sinking feeling of deja vue of the former, about to despatch them in his early westerns.
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