Mexico’s peso fell the most in four weeks after central bankers signaled that a further slowdown in inflation could prompt them to lower interest rates.
The currency dropped 0.6 percent to 12.6621 per U.S. dollar at 4 p.m. in Mexico City. It’s the peso’s biggest decline since Dec. 21. Yields on peso bonds due in 2022 fell 11 basis points, or 0.11 percentage point, to 5.2 percent. They dropped 20 basis points this week.
The central bank’s board, led by Governor Agustin Carstens, left the overnight lending rate at 4.5 percent for the 32nd consecutive meeting, as forecast by all 19 analysts surveyed by Bloomberg. In a statement accompanying the decision, policy makers said that if a “downward trend in general and core inflation” is confirmed, “a reduction in the one-day interbank interest rate may be advisable.”
“Everyone expected a less dovish statement,” Ramon Cordova, a currency trader at Banco Base SA in San Pedro Garza Garcia, Mexico, said in a phone interview. “It should show itself temporarily in a weaker peso.”
Annual inflation last month slowed to 3.57 percent, within the central bank’s target range of 2 percent to 4 percent for the first time since May. Inflation will end this year at 3.79 percent, according to the median estimate in a survey by Citigroup Inc.’s Banamex unit released on Jan. 7.
The peso’s decline will likely be short-lived as the prospect of higher capital gains from lower rates lures more foreign investors to Mexico’s fixed-income market, according to Eduardo Suarez, a Latin American currency strategist at Bank of Nova Scotia.
“Although the knee-jerk reaction is likely to be Mexico peso negative, the second impact should be supportive as it suggests upside for Mexican bonds,” Suarez said in an e-mailed response to questions.
Foreign investment in the $144 billion market for fixed- rate peso bonds, known as Mbonos, grew to 54.9 percent on Jan. 8, the highest proportion since February 2000, central bank data show. Foreign hedge funds, pension funds and mutual funds tracked by EPFR Global poured a record $8.78 billion into the country’s debt last year.
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