Question

You own a business that does a lot of business with Mexico.  How would your business be affected (at least in the short run) if the central bank of Mexico intervened in the foreign exchange markets by exchanging Pesos for dollars?  What if the Mexican central bank used indirect intervention and lowered interest rates?

Answer 1

When I own a business that is doing business with the Mexico, and if my receivables are exposed in Mexican pesos and if the central bank of Mexico has intervened in the foreign exchange market by exchanging pesos for dollars then it would be impacted in my overall receivables.

If the central bank has sold Mexican pesos, then it is trying to lower the value of the Mexican pesos and in that scenario my overall receivables in Mexican pesos will be decreasing but when the central bank has bought the Mexican pesos in respect to the American Dollars then it has tried to to strengthen the Mexican pesos and it would be having a positive impact on my overall receivables in Mexican pesos.

If the Mexican Central Bank has used indirect interventions and they have lower the interest rate it will mean that the overall value of Mexican pesos will be going down due to lowering of the interest rate because there will be a negative implication on the Mexican pesos and my overall receivables in Mexican pesos will the decreasing and overall payables will also be decreasing in Mexican peso so it is dependent upon my level of exposure in the Mexican pesos because indirect intervention by the central banks will be leading to depreciation of the mexican currency due to cutting of interest rates.