Mexican Peso Tumbles as Output Drop Spurs Rate-Cut Speculation

Mexico’s peso plunged as industrial production fell three times more than analysts forecast in March, stoking speculation that policy makers will cut borrowing costs in Latin America’s second-biggest economy.

The peso weakened 1.3 percent to 12.1512 per U.S. dollar at 10:29 a.m. in Mexico City, paring its rally this year to 5.8 percent, still the biggest among 16 major currencies tracked by Bloomberg. The peso has fallen 0.5 percent this week.

The national statistics agency reported that industrial production dropped 4.9 percent in March from a year earlier, the biggest decline since the 2009 recession and more than the 1.4 percent median forecast of 16 economists surveyed by Bloomberg. Central bank board members said in minutes of their April 26 policy meeting, published today, that “there are downside risks to growth” for Mexico.

“The market expected something bad, but not as bad as it was,” Mario Copca, a currency and fixed-income strategist at Metanalisis SA in Mexico City, said in a telephone interview, referring to the output decline. “There could be a cut to the reference rate in the future once inflation falls amid the weak economic data.”

Yields on six-month swaps tied to the interbank rate were headed for a drop this week to 4.18 percent, indicating traders are pricing in about a 64 percent chance that policy makers will reduce borrowing costs over the next six months.

The central bank unexpectedly cut its target lending rate by a half-percentage point to a record low 4 percent on March 8 as growth slowed. Policy makers left the benchmark unchanged at their meeting on April 26.

The national statistics agency reported yesterday that consumer prices climbed 4.65 percent in April from a year earlier, higher than a 4.25 percent annual inflation rate in March. The central bank’s target range is 2 to 4 percent.

Yields on peso bonds due in December dropped four basis points, or 0.04 percentage point, to a record low 3.74 percent, according to data compiled by Bloomberg. Yields on debt maturing in 2024 rose seven basis points to 4.55 percent.

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

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

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