Bank of Mexico says it could act to restore 'order' in markets

By Anthony Esposito and Brendan O'Boyle

MEXICO CITY (Reuters) - The Bank of Mexico is monitoring recent volatility in domestic financial markets, including foreign exchange markets, and could act to restore order in the event of "atypical" or "extreme" behavior, the bank's governor Victoria Rodriguez said on Wednesday.

Mexico's central bank "will be very attentive to the development of our markets, and if they show atypical behavior or extreme volatility, and if warranted, it could take the necessary measures to restore their orderly behavior," Rodriguez said during a presentation of the bank's biannual financial stability report.

Banxico, as the Mexican central bank is known, could act on its own or with Mexico's foreign exchange commission, comprised of officials from the finance ministry and the Banxico board members, Rodriguez said.

Mexico's peso, one of the world's best performing emerging market currencies in recent years, has weakened over 10% since the Morena ruling party coalition dominated the June 2 general elections, emboldening politicians to pursue controversial reforms to the constitution. That has shaken investor confidence.

"It is normal for financial markets to present adjustments by incorporating scenarios that had not been anticipated, as is happening in the recent episode," Rodriguez said of the peso's sharp depreciation.

Rodriguez underscored that Banxico does not have a fixed goal for the exchange rate, like it does for the inflation rate, but that the board is monitoring the peso's impact on inflation and that it could be some time before the exchange rate volatility reflects on inflation.

Wednesday's report found that the Mexican financial system is solid and resilient, with the banking system showing resilience in stress tests probing its solvency and liquidity.

While market volatility is one of four main risks to Mexico's macro-financial stability, according to the report, directors on Wednesday urged calm amid the turbulence of recent days.

"Mexico's solid economic fundamentals that led to the good performance of our markets prior to the aforementioned episode remain in force," Rodriguez said.

Mexico's President-elect Claudia Sheinbaum has sought to reassure nervous investors after her landslide victory this month, in which Morena secured a super-majority required to pass the constitutional reforms unopposed in the lower house of Congress, while coming just shy of the super-majority in the Senate.

Sheinbaum has, at the same time, defended as a top priority a judicial overhaul championed by outgoing President Andres Manuel Lopez Obrador, which critics argue will fundamentally alter its independence from politics as well as chip away at democratic checks and balances.

Lopez Obrador argues the judicial reform, along with a slew of other proposed constitutional reforms, is necessary to eliminate corruption and empower voters.

(Reporting by Brendan O'Boyle and Anthony Esposito; Editing by Josie Kao)