Mexico’s peso has tumbled this month, prompting speculation that the central bank may step in to support the currency amid stalled Nafta negotiations and electoral uncertainty.
One metric, however, indicates that Banxico may stay on the sidelines for now. The peso’s market liquidity, as measured by the daily bid-ask spread, is far smaller now than during the most recent episodes of intervention, data compiled by Bloomberg show. A tight spread tends to reflect more balanced supply and demand, features of a sufficiently liquid market.
Policymakers have repeatedly stressed their goal isn’t to shore up the currency at a particular level but to ensure the smooth functioning of foreign-exchange markets. So indications of decent peso liquidity may allow them to hold off for now.
Peso Bid-Ask SpreadLiquidity conditions now much better vs 2017 interventions
Source: Bloomberg
Note: Chart shows 10-day moving average of bid-ask spread
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The peso’s bid-ask spread, based on its 10-day moving average, is about 2.3 cents as of Monday, compared with 4.3 cents in December when Banxico last intervened. The spread was close to 5 cents at the beginning of 2017, when Banxico sold dollars into the spot market and around 4 cents a month later, when the central bank rolled out its FX hedge auctions, which have remained in place and acted as the main policy instrument for market intervention.
Banxico will hold its regular monetary policy meeting on Thursday. Nine of 14 analysts surveyed by Bloomberg expect a rate increase amid the peso’s slump. Whether the central bank hikes or not, risks of further MXN depreciation will persist as the July 1 election looms, Rabobank senior economist Christian Lawrence said in a note to clients.
— With assistance by Justin Villamil, and Nacha Cattan
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