Mexico's Peso Is Looking Tame After a Very Bumpy Start to 2016

Options traders’ expectations for swings in the Mexican peso fell to a two-month low, signaling the success of policy makers’ move to sell dollars directly to banks at their discretion and end a rules-based intervention program.

The shift by central bank Governor Agustin Carstens in mid-February jolted markets and helped curb one-month implied Volatility in the peso, which had jumped to a two-year high. The currency has rebounded 7.5 percent since the government’s announcement, which also included a surprise interest-rate increase along with budget cuts, even after falling Wednesday with major dollar counterparts.

The fall in implied volatility is the second-biggest in emerging markets, trailing only the decline for Russia’s ruble. Mexico’s government had complained that the peso, the most-traded emerging-market currency, was trading apart from its fundamentals given that it is often used by traders to hedge against other risks. Moving away from regularly-scheduled auctions made it harder for traders to take advantage of the auctions as entry points, according to Eduardo Suarez, a strategist for Latin America at Bank of Nova Scotia.

“You added two-way risk to bets versus the peso,” he said in an e-mailed response to questions. “It’s both the intervention strategy, plus a general better tone in emerging-market foreign Exchange .”

A gauge of emerging-market currencies reached its highest since November on March 17.

Earlier this month, Carstens said that policy makers’ moves in mid-February were the result of meticulous analysis by the nation’s monetary and fiscal authorities.

“We won’t question using them again if it’s necessary,” he said.

To contact the reporter on this story: Ben Bain in Mexico City at bbain2@bloomberg.net. To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net, Sebastian Boyd, Jessica Brice

By: Ben Bain

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