External Factors Hammer The Peso Harder Than Reform Bills, Says Banxico

External Factors Hammer The Peso Harder Than Reform Bills, Says Banxico

By Carlos Arredondo
Ever since Mexico's Morena candidate Claudia Sheinbaum was declared president-elect a
few weeks ago, the exchange rate went on an upward spree as the Mexican currency started losing strength against the U.S. dollar.

The general consensus among analysts pointed to an aggressive reform to the judicial system —considered by Sheinbaum and her transition team as a priority— as the main reason for the peso slide, but according to Jonathan Heath, Deputy Governor of Banxico, the legislation bill is just one of several factors adding pressure to the exchange rate and it’s not by far the main determinant.

In an exclusive interview with MEXICONOW, the central bank Deputy Governor shared what he considered are the main challenges the country’s economy will face in the short term and how solid are the fundamentals to deal with what’s coming.

The official made clear that Banxico does not care or does not look for the exchange rate to go in any specific direction, but it’s concerned about the volatility, so they’re aware for the adjustment to take place in a relatively smooth fashion.

According to Mr. Heath, there are several different mechanisms to make that happen. Also, the Bank has almost 220 billion dollars in reserves along with a swap line with the U.S. Federal Reserve and a credit line with the International Monetary Fund, as well as other resources that can be used at any given moment.

He said the Mexican economy has experienced some changes in the last few years and factors that used to have a strong impact in the exchange rate no longer do, such as oil prices —since we’re no longer net oil exporters— and the holding of Mexican public debt in the hands of foreign investors, which has dramatically decreased in the last 10 years.

However, a critical factor that keeps the exchange rate going back and forth is the fact that over 80% of all peso transactions with other currencies, especially the dollar, take place outside the country. According to the Deputy Governor there’s a large number of transactions that use the peso because it is a very liquid currency and therefore it is one of the three most traded emerging market currencies in the world today.

“24 hours, 7 days a week someone is exchanging pesos somewhere in the world and the exchange rate is being determined in who knows what geographic location. Even a large part of these transactions occurring outside the country don't even involve a Mexican financial institution”, he added.

Read the complete interview in the upcoming MEXICONOW print edition.

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