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Bank of Mexico intervenes directly in FX market to support peso, more intervention likely in weeks ahead
The Bank of Mexico intervened directly in the FX markets yesterday in order to strengthen the Mexican peso. The weakening in the start of New Year seemed too much for the central bank. As the inauguration of President Trump draws near, the pressure on the peso is rising again. The USD/MXN pair exceeded its weakest levels yesterday from around the U.S. election in November, weakening to close to 21.60.
There were some announcements made in the U.S. that might have contributed to the worries about how Mexico might fare under the presidency of Trump. Ford announced that it might not go ahead with setting up a manufacturing plant in Mexico. This decision was applauded by Trump, noted Nordea Bank in a research report.
The Banxico intervened directly in the FX markets to underpin the MXN. The central bank did not disclose the amount, however, Reuters reported that the central bank sold about USD 1 billion from its FX reserves to purchase MXN, stated Nordea Bank.
More intervention in the FX market is expected in the weeks ahead. Trump has announced a general news conference 11th of Jan and additional news is expected around his inauguration time. Rate hikes are also expected in the months ahead as the Mexican peso’s weakening passes through to higher inflation.
The risk profile for the MXN is believed to be slightly skewed at these levels. The Bank of Mexico cannot tolerate additional weakening from the already extremely weak levels, added Nordea Bank. The support by central bank is expected if Trump comes through with some of his anti-Mexico election promises. But if Trump softens his stance, MXN might be the best performing EM currency in 2017, according to Nordea Bank.