UPDATE 4-Mexico hikes key rate, peso surges after surprise FX intervention

miércoles 17 de febrero de 2016 14:49 GYT
 

(Adds fresh quote, details on auctions, reserves)
    By Miguel Gutierrez and Michael O'Boyle
    MEXICO CITY, Feb 17 (Reuters) - Mexico's central bank on
Wednesday unexpectedly raised its benchmark interest rate
 by 50 basis points to 3.75 percent, sparking a
rally in the long-battered peso currency, while the government
vowed to cut spending.
    Mexico's central bank also intervened directly in the
foreign exchange market to sell dollars as part of a major
policy shift to support the peso, which plunged to fresh lows in
recent weeks.
    "This is not the beginning of a cycle of interest rate
hikes," Agustin Carstens, governor of the Banco de Mexico, the
country's central bank.
    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.
    Finance Minister Luis Videgaray said the government would
make spending cuts to the 2016 budget to the tune of 0.7 percent
of gross domestic product. He said the government would also
propose that state oil company Pemex cut its expenses by 100
billion pesos. 
    "Man, catching everyone by surprise. These guys are going
the classical defense route. One would've figured that they
wouldn't hike after the cuts from Hacienda/PEMEX," said Edwin
Gutierrez, head of emerging market sovereign debt at Aberdeen
Asset Management in London.
    The peso, which has been hit by sinking oil prices, surged
on Wednesday, approaching its strongest level since Jan. 15,
after marking a new all-time low last week at 19.4480 per U.S.
dollar.
    The peso  gained as much as 4.86 percent on
Wednesday to 17.962 per dollar, at one point posting its biggest
one-day gain since September 2011. It last traded at a 3.27
percent rise on the day at 18.2650.
    Dan Ivascyn, Group Chief Investment Officer at PIMCO, which
has exposure to Mexico, told Reuters: "We find Mexican bonds and
currency attractive from a long-term perspective. Short-term
performance will continue to be influenced by moves in oil
market."
    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.
    Shares of companies with high dollar-debt exposure, such as
banks and cement company Cemex, were sharply higher.
    Cemex traded 8.5 percent firmer at 9.54 pesos a
share, while Banorte was up 4.6 percent at 90.46
pesos.
    Last month Mexico's currency commission, which is comprised
of the central bank and the Finance Ministry, said it would
maintain a daily dollar auction program that offered up to $400
million a day whenever the peso falls sharply.
    The central bank spent over $28 billion in the auctions,
which were introduced in December 2014, according to Banorte.

    
 (Additional reporting by Elinor Comlay and Alexandra Alper in
Mexico City, Jennifer Ablan in New York and Tariro Mzezewa in
London; writing by Simon Gardner; editing by G Crosse, JS Benkoe
and W Simon)