Mexico’s peso dropped for a second straight day as a U.S. central banker said the Federal Reserve’s decision to maintain monetary stimulus was close and policy makers may curtail the program next month.
The currency slipped 0.6 percent to 12.7728 per dollar at 10:04 a.m. in Mexico City, paring a weekly gain to 2.1 percent. It rallied 2.1 percent on Sept. 18 after the Fed surprised analysts in deciding to maintain the pace of its $85 billion in monthly asset purchases that have helped boost demand for higher-yielding assets including Mexico’s securities.
The peso has declined in the past two days as investors reconsidered the timing of a potential reduction in the Fed’s quantitative easing program. A small tapering of bond buying is possible next month after the Fed made a close call this week in deciding not to slow purchases, St. Louis Fed President James Bullard said today on Bloomberg Television’s “Bloomberg Surveillance” with Tom Keene.
“People realize tapering is coming,” Eduardo Suarez, Latin America currency strategist at Scotiabank, said in an e-mailed response to questions. “Some of the larger players could use the liquidity of a rally to unwind some of their positions until they get to the levels of exposure they feel comfortable with” in an environment without quantitative easing, he said.
Mexican policy makers were split in their decision to cut the interest rate this month to a record low in a bid to boost the slowest economic growth in more than three years.
The central bank’s board unexpectedly reduced borrowing costs by 25 basis points to a record low 3.75 percent Sept. 6, saying the economy experienced a significant and unexpected slowdown in the second quarter. Two of five board members voted against a rate cut this month, the minutes of the meeting published today showed.
The Fed will now wait until December before taking the first step in slowing its monthly bond purchases, according to 24 of 41 economists surveyed by Bloomberg Sept. 18-19. The median estimate in an Aug. 9-13 poll projected a paring at this week’s meeting.
Yields on Mexican peso bonds maturing in 2024 rose two basis points, or 0.02 percentage point, to 5.83 percent, according to data compiled by Bloomberg. The yields have tumbled 31 basis points this week.
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