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Mexico Peso Swings Drop on U.S. Budget Deal Progress Speculation

Mexico’s peso volatility fell to a 20-month low amid speculation that U.S. leaders are progressing toward a budget deal and avoiding a possible economic slowdown in the Latin American nation’s top export market.

One-month historical volatility, which measures the magnitude of the peso’s fluctuations over the period, sank to 7.27 percent at 4 p.m. in Mexico City, the lowest on a closing basis since April 2011, according to data compiled by Bloomberg. The peso was little changed at 12.7186 per U.S. dollar for a gain this year of 9.6 percent.

While the peso has strengthened recently on speculation U.S. leaders are moving closer to a deal to avoid automatic tax increases and spending cuts, further increases will be limited without an agreement, according to Rafael Camarena, an economist at Grupo Financiero Santander Mexico SAB. Should officials fail to reach an accord, the spending cuts and tax boosts may result in a recession next year in the U.S., according to the Congressional Budget office.

The peso “is stabilizing at these levels,” Camarena said by telephone from Mexico City. “Until we see more concrete announcements in the U.S. we could have it stay around here.”

President Barack Obama and House Speaker John Boehner are negotiating a budget compromise to avoid more than $600 million in tax increases and spending cuts scheduled to take effect Jan. 1. The U.S. current-account deficit narrowed in the third quarter, helped by slowing imports, according to report from the Commerce Department released today. The U.S. buys about 80 percent of Mexico’s exports.

Mexico sold 7 billion pesos ($550 million) in 28-day bills, known as Cetes, at auction today, according to the central bank. It also sold 8 billion pesos of bills maturing in 91 days and 9 billion pesos of 175-day securities. The yield at auction on the four-week notes fell 0.21 percentage point, the biggest weekly decline since January 2011, to 3.93 percent, according to data compiled by Bloomberg.

Yields on peso-denominated bonds due in 2024 rose three basis points, or 0.03 percentage point, to 5.50 percent today, according to data compiled by Bloomberg.

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