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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 0.7 percent to 12.0849 per U.S. dollar at 4 p.m. in Mexico City, paring its rally this year to 6.4 percent, still the biggest among 16 major currencies tracked by Bloomberg. The peso has fallen 0.1 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 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 dropped this week to 4.2 percent, indicating traders are pricing in about a 56 percent chance that policy makers will reduce borrowing costs over the next six months.

The currency rallied on May 8 to a level stronger than 12 per dollar for the first time since August 2011 as Fitch Ratings raised Mexico to BBB+, the third-lowest investment grade, from BBB. The upgrade of the nation’s credit rating was its first in five years.

Relative Strength

The seven-day relative strength index for the peso versus the dollar rose that day to above 70, a level that some traders see as an indication that the currency’s gains are hard to sustain. The index dropped to below 50 during trading today, according to data compiled by Bloomberg.

Grupo Financiero Banorte SAB strategist Juan Carlos Alderete said in a report to investors today that while the increasing expectation of a rate cut may moderate the pace of the Mexican peso’s appreciation, he still favors the currency.

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.

Inflation Data

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.

HSBC changed its interest-rate projection today and is now calling for a cut of 0.5 percentage point to 3.5 percent in July, from a previous call of no change to the 4 percent reference rate through 2014. Sergio Martin, an economist with the bank, said in an e-mailed statement today that the new projection in part reflects lower gross domestic product growth and low core inflation, Martin says.

Yields on peso bonds due in December dropped three basis points, or 0.03 percentage point, to a record low 3.74 percent, according to data compiled by Bloomberg. Yields on debt maturing in 2024 surged 10 basis points to 4.58 percent.

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