MXN: Low risks of imminent moves to support the peso - BBH

According to analysts from Brown Brother Harriman, the sharp decline of the Mexican peso that is taking place since the beginning of the month, is different from the February decline and the risk of an intervention remain low.

Key Quotes:

“Ongoing MXN weakness is generating a lot of talk about a policy response by Banco de Mexico. We think the current situation is a bit different than on February 17, when the central bank announced a 50 bp intra-meeting hike in the policy rate to 3.75% and intervened heavily. As things stand now, we think risks of imminent moves to support the peso are low.”

“The timing of any moves to support the peso is key. When the February moves were announced, EM and “risk” were already rallying and so Banxico showed impeccable timing and technique. As we wrote then, Mexico’s actions could be filed perfectly under the “Golden Rules” of FX intervention: 1) surprise the markets, 2) go big, and 3) go WITH the market, not against it.”

“With the peso (and the rest of EM) on the defensive, a move now would seem to go against these “Golden Rules.” We also question whether the policymakers are willing to “go big” again when the growth outlook for Mexico remains a bit soft.”

“Market fears of FX intervention could help check the pace of peso weakness a bit in the coming days. However, we do not think the conditions are right just yet for any sort of intervention by Banxico. We do not think there is any exchange rate level that triggers intervention. If things get worse for EM and we see heightened risk of large, destabilizing moves in the exchange rate, then the risks of intervention will rise. But we’re simply not there yet.”