| MEXICO CITY
MEXICO CITY Mexico on Wednesday launched an assault on speculators who have battered the local peso currency by unleashing a surprise interest rate hike, a new intervention policy and budget cuts.
Mexico's peso MXN= surged nearly 3 percent after the central bank offered dollars directly to banks, and then unexpectedly raised its benchmark interest rate MXCBIR=ECI by 50 basis points to 3.75 percent.
It was the first time it has moved without advising the market the board was meeting since introducing a reference rate in 2008.
The Finance Ministry also announced cuts to the 2016 budget in a bid to shore up confidence in Mexico's economy following a collapse in oil prices that hobbled government revenue from crude sales.
Central Bank Governor Agustin Carstens said the board decided to hike to help stem peso losses and keep inflation expectations from spiking higher and risking an upward spiral in consumer prices, which rose off a record low in January.
The peso had been the most-punished, highly traded currency in the global market rout of early 2016, slumping to a record low near 19.50 per dollar. But Carstens said that the peso had been unfairly hammered and was not trading on its own fundamentals.
"This is not the beginning of a cycle of interest rate hikes," he said. "It was a way of showing our protest, our clear rejection of those levels" of the peso against the dollar.
Mexico's peso, one of the world's most liquid currencies, is often used as a money-making short when general sentiment turns sour against emerging market assets.
Shares of companies with high dollar-debt exposure, such as cement company Cemex, were sharply higher.
Cemex (CMXCPO.MX) jumped 8.9 percent, while Banorte (GFNORTEO.MX) rose 6.4 percent since higher interest rates boost banks' balance sheets.
The central bank's direct intervention in the foreign exchange market to sell dollars marks a major policy shift to support the peso.
The Banco de Mexico had sold dollars in rules-based auctions since a deep slump in the peso in 2014. Wednesday's intervention was the first time the bank opted for direct dollar sales since the 2009 financial crisis.
Carstens said the central bank was ending the daily auction regime, where it sold up to $400 million on days of big peso losses, since it had become anticipated by market players. He suggested the central bank made its bold move to smoke out some specific betting strategies against the Mexican peso.
"There were many other strategies that were being used and that were present in the market that were destabilizing the exchange rate and taking it to a level that was not appropriate for the performance of the Mexican economy," he said.
Finance Minister Luis Videgaray said the government would make spending cuts to the 2016 budget to the tune of 132 billion pesos ($7.23 billion), or about 0.7 percent of gross domestic product. State oil company Pemex would account for 100 billion pesos of those expenditure cuts, he said.
Fund managers applauded Mexico for its timing. Before the move, the peso was gaining due to a rally in the oil market that was already forcing speculators to unwind bets against Mexico.
"It’s the perfect positive storm for Mexico and that helps the Mexican peso," said Ruggero de’Rossi, a senior portfolio manager for emerging market debt at Federated Investors.
The currency MXN=D2 MXN= at one point gained nearly 5 percent, breaking past the 18 level to 17.962 per dollar, but it pared back gains for the day to 2.8 percent at 18.36 per dollar, still its biggest one-day gain since September 2011.
Not all market analysts welcomed the move.
"They are putting all the meat on the grill and they could end up with no tools when things get even worse," said Marco Oviedo, an economist at Barclays in Mexico City.
Mexico's economy has slowed as uneven U.S. demand for its exports and tumbling oil prices have hit industrial production, but improving consumer spending has helped support growth.
(Additional reporting by Elinor Comlay, Alexandra Alper and Adriana Barrera in Mexico City, Jennifer Ablan in New York and Tariro Mzezewa in London; Writing by Simon Gardner; Editing by W Simon and Matthew Lewis)