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Mexico Peso Drops on Rate-Cut Speculation Before Policy Decision

Mexico’s peso fell before tomorrow’s policy rate announcement in which traders are wagering that Banco de Mexico will trim benchmark borrowing costs for the first time since July 2009.

The peso depreciated 0.1 percent to 13.1731 per U.S. dollar at 4 p.m. in Mexico City, from 13.1639 yesterday. The decline pared the currency’s rally in 2012 to 5.8 percent, the best performance among the 16 most-traded currencies tracked by Bloomberg.

Interest-rate futures contracts due next month show traders are betting that policy makers will cut the benchmark rate from a record low 4.5 percent, according to data compiled by Bloomberg. The peso’s decline is being fueled by speculation that a cut to Mexico’s key rate may pare demand for the Latin American country’s higher-yielding assets, Pepe Curiel, a currency trader at Intercam Casa de Bolsa SA in Mexico City, said by phone.

The peso’s drop “has a lot to do with speculation on Banco de Mexico moving rates tomorrow,” Curiel said. “The market is very nervous about tomorrow’s decision.”

U.S. central bankers yesterday repeated that borrowing costs are likely to remain “exceptionally low” at least through late 2014.

Mexico’s currency also declined after more people than forecast filed applications for unemployment benefits in the U.S., the nation’s biggest trading partner. While U.S. jobless claims fell by 1,000 to 388,000 in the week ended April 21, the median forecast of 48 economists in a Bloomberg News survey was for 375,000.

‘Remains Elevated’

Federal Reserve policy makers also said yesterday that while labor-market conditions have improved in the economy that’s the destination of 80 percent of Mexico’s exports, the unemployment rate “remains elevated.”

Latin America’s second-biggest economy expanded 6.24 percent in February from a year earlier, exceeding the 5.5 percent median forecast in a Bloomberg News survey of 15 analysts. Growth may have “positive surprises” after recent production and consumption data beat forecasts, Finance Minister Jose Antonio Meade said in a March 8 interview.

The peso has fallen 2.8 percent this month as concern mounts that Europe’s debt crisis will curb global growth and damp Mexican exports.

The “relatively strong” Mexican economy and the currency’s recent decline mean that central bank policy makers won’t cut borrowing costs tomorrow, according to Mike Moran, a currency strategist at Standard Chartered Bank.

“It’s going to be range-bound going into the meeting,” Moran said in a telephone interview from New York. “Any dovish expectations toward Banxico will be disappointed.”

The yield on government peso-denominated debt due in December 2024 declined two basis points, or 0.02 percentage point, to 6.26 percent, according to data compiled by Bloomberg. The price rose 0.22 centavo to 132.59 centavos per peso.

To contact the reporter on this story: Ben Bain in New York at bbain2@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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