A free-floating peso absorbs an oil and Fed shock

Having abandoned a fixed exchange rate after 1994-95, Mexico entered the 2014-16 period of falling oil prices and anticipated US monetary tightening with a freely floating peso instead of fixed reserves to defend. Deputy Governor Manuel Sánchez noted in a June 2016 speech that the peso had been hurt more than other emerging-market currencies that year, yet argued this was the exchange rate doing its job: a flexible peso, he said, had performed the crucial role of buffering markets in an adverse financial environment rather than forcing the central bank to burn through reserves as it had in 1994. Sánchez also pointed to a shift in who held Mexican government debt during the stress - short-term, zero-coupon cetes saw nonresident holders exit, while longer-dated bonds actually grew in absolute nonresident holdings - evidence that Mexico's debt structure had become more resilient to capital-flow reversals than it was two decades earlier. The lingering risk he flagged was pass-through from currency weakness into inflation expectations, a tension that has repeatedly reappeared in Mexico's CPI and peso charts whenever external financial conditions tighten.