Handelsblatt Exclusive Mexican Central Bank Head: Peso Drop an Overreaction

Mexico's central bank chief in an interview said he's prepared to act to stem the decline of the peso since Donald Trump's election, but stopped short of setting a specific currency limit.

The exchange markets have overreacted by selling the Peso in the wake of Donald Trump’s election victory, the head of Mexico’s central bank, Agustin Carstens, told Handelsblatt.

“I think the markets overreacted,” Mr. Carstens said in an interview. “The exchange rate has moved more than I would say is justified by the fundamentals. That is basically a reflection of uncertainty.”

Mr. Carstens said Mexico’s central bank would selectively intervene in the market to tamp down on exchange rate volatility but stopped short of announcing a fixed intervention to limit the depreciation.

“We have done these selective interventions more than anything to avoid very volatile conditions, in which small transactions can already move the exchange rate a lot,” Mr. Carstens said. “But we do not have a policy to defend a particular level of the exchange rate through interventions.”

The central bank will not rely on such market interventions to defend the value of the Peso, Mr. Carstens said. Instead it will look to more traditional measures like interest rates.

“The main policy instrument that we are using to anchor the value of the currency is the fiscal- and monetary policy stances,” he said.

Though Mr. Carstens believes the currency markets have overreacted, he also said Mr. Trump could have a serious impact on the Mexican economy if he follows through with his protectionist campaign rhetoric.

"If Mexico has a more difficult access to the U.S. market that would affect the manufacturing sector, but that is up to the negotiations," the central banker said.

The U.S. administration has walked back some of its hard-line rhetoric. The White House said that Mr. Trump's threat to impose a 20-percent tax on goods imported from Mexico was only one of several options.

Mr. Trump also appeared to soften his stance on a border wall after the election, saying some areas could be fencing.

"Since he came into power some more positive statements have been made from his side,"  Mr. Carstens said. "Mexican and US officials have just started their discussions. We will see what the result is."