Afterward, the Bank of Mexico announced it would increase its overnight lending rate by 50 basis points to 3.75%. But Carstens said that the peso had been unfairly hammered and was not trading on its own fundamentals. The currency, which last week fell to a record low, jumped 3.3 percent to 18.2822 per dollar at 10:37 a.m.in Mexico City.
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Capital Economics notes the government announced budget cuts alongside today’s rate increase, but whether the peso ultimately stabilizes will depend on whether oil bottoms and sentiment towards emerging markets improves.
Mr. Carstens said the central bank made discretionary dollar sales early Wednesday as a “protest” against the level to which the market had pushed the exchange rate.
The shift in foreign exchange intervention policy marks an unexpected break from Banco de Mexico’s general preference for rules-based intervention and is the first time since 2009 that it has opted for direct dollar sales.
Mexico’s peso led world gains, climbing the most in more than four years, as Banxico was said to sell dollars directly to banks to support the currency.
Separately Wednesday, Mexico’s government said it would cut the 2016 budget by 132.2 billion pesos (around $7 billion), equivalent to roughly 0.7 percent of gross domestic product, “in response to the deteriorated global scenario”.
Mexico is committed to a freely floating exchange rate and usually refrains from opting for more direct forms of intervention used by other emerging market economies. In addition, the state-owned Petroleos Mexicanos will propose a 100 billion peso spending reduction, Videgaray said. “Short-term performance will continue to be influenced by moves in oil market”.
The currency MXN=D2 MXN= at one point gained almost 5 percent, breaking past the 18 level to 17.962 per dollar, but it pared back gains for the day to 2.8 percent at 18.36 per dollar, still its biggest one-day gain since September 2011.
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Prices for Mexican oil exports averaged $24.56 a barrel Wednesday.
