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Mexico Changes Strategy to Protect Peso


People walk past a board displaying the exchange rate for Mexican peso against the U.S. dollar and the euro in a Bank in Mexico City, Mexico, Nov. 15, 2016.

Mexico’s central bank chief said Wednesday the bank altered course on how to protect the peso after a couple of tweets by U.S. President Donald Trump in early January pummeled the currency to near historic lows and wiped out the effect of a $2 billion currency intervention.

The Banco de Mexico in early January had sold dollars to fight off the peso’s nosedive to record lows amid fears the protectionist policy pronouncements of then President-elect Trump could further hammer Latin America’s second-largest economy.

“I’ll say it like this, in simple terms: with two tweets from you know who, the effect [of that intervention] vanished,” Mexican Central Bank chief Agustin Carstens said Wednesday.

“It was precisely then we thought that instead of using hard currency like dollars, it would be better to move to a scheme in which there was the possibility of offering hedges” without having to eat into Mexico’s currency reserves, Carstens added.

Carstens did not specify what tweets he was referring to. But Trump in early January targeted Toyota Motor Corp. and General Motors Co. with the threat of a “big border tax” over cars built in Mexico meant for U.S. consumers.

Since then, Mexico’s central bank has moved from intervening directly in the foreign exchange market through dollar sales by implementing an exchange hedging program for up to $20 billion.

The bank earlier Wednesday sold its entire offer of $200 million in foreign exchange hedges in an auction in which demand far outstripped supply, reflecting appetite for the program aimed at supporting the country’s peso currency.

Carstens said that the peso, which fell to a low of nearly 22 per dollar following the U.S. elections in November but has since recouped most of those losses, is still undervalued and has room to appreciate.

Future interest rate decisions by the U.S. Federal Reserve should not cause further depreciation in the peso, Carstens added.

Regarding monetary policy, Carstens also said that depending on the evolution of inflation expectations, the Banco de Mexico may be able to stop following Fed decisions in tandem.

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