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Mexico Peso Set for Worst Week in 11 Months on Rate Cut Prospect

Mexico’s peso fell, heading for its worst week since June, as slower-than-forecast economic growth added to speculation the central bank will cut borrowing costs and on concern the Federal Reserve will reduce stimulus.

The currency depreciated 0.3 percent to 12.3170 per U.S. dollar at 10:37 a.m. in Mexico City, extending its decline this week to 1.9 percent, the biggest since the five days ended June 1, 2012. The peso has rallied 4.4 percent this year, the biggest gain among major dollar counterparts.

Nine-month interest-rate swaps have have fallen three basis points, or 0.03 percentage point, this week to 4.10 percent, signaling the market projects a 96 percent probability of a rate cut in that period. Gross domestic product rose 0.8 percent in the first quarter from a year earlier, the slowest pace since the end of 2009, the government reported today.

“The expectation of another cut has increased,” Javier Belaunzaran, who helps manage about $5 billion at Grupo Financiero Interacciones SA in Mexico City, said in a telephone interview. “It’s not yet a consensus, but I’m hearing more and more people talking about it.”

The central bank unexpectedly reduced 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.

Yields on peso bonds due in 2024 rose two basis points, or 0.02 percentage point, to 4.64 percent today, according to data compiled by Bloomberg. The price fell 0.23 centavo to 148.03 centavos per peso.

The peso dropped against the dollar along with all of the other major currencies tracked by Bloomberg on speculation the Fed is moving closer to ending asset purchases that sent a flood of investment into higher-yielding emerging-market assets including Mexico’s bonds.

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