On Thursday, which, coincidentally, was also Cinco de Mayo, Mexico’s central bank left interest rates unchanged. The central bank in Latin America’s second-largest economy had to the room to be somewhat accomodative as rebounding commodities price have helped the once downtrodden peso bounce back this year.
Up 11.1% over the past 90 days, the iShares MSCI Mexico Capped ETF (NYSEArca: EWW) is rebounding as well. The iShares Latin American 40 ETF (NYSEArca: ILF), which features Mexico as its second-largest geographic weight, is rebounding as well.
Latin America’s central bank policies are notable, at least among the region’s two largest economies, Brazil and Mexico. Although Brazil’s central bank has not hiked interest rates since last year, its benchmark borrowing cost of 14.25% is among the highest in the world, emerging or developed markets.
Earlier this year, Mexico’s central bank surprisingly raised rates to help prop up the peso.
Mexico is at risk as its reserve coverage ratio, or foreign exchange reserves divided by its funding gap, is just 1.6 years, which is less than the seven years of Russia, another oil exporter. Additionally, Mexico is constrained by its near-zero real interest rate, leaving little room to cut rates if its economy weakens.
However, some market observers are enthusiastic about Mexico’s long-term prospects as the country aims to be home to one of the world’s 10 largest economies.[related_stories]