Barclays Says Traders’ Rate Bets Out of Whack as Mexico Slumps

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Traders in Mexico are getting way ahead of themselves, according to Barclays Plc’s Marco Oviedo.

They see interest rates rising by 1.2 percentage points in the next year -- twice the increase forecast for benchmark borrowing costs in the U.S.

That’s far too aggressive, says Oviedo, the firm’s chief Mexico economist, especially at a time when the central bank has lowered its forecast for economic growth three times in the past six months. Central bank officials have also signaled they will probably follow the Federal Reserve’s lead in boosting rates to avoid any potential pullout by foreign investors.

“I’m sure Mexico is going to react to the Fed, but that doesn’t mean it’s going to hike at the same pace or faster, as the market is pricing,” Oviedo said.

Oviedo, who correctly predicted in March that the nation’s currency would plunge to a record, predicts the one-year swap rate will fall from its current level of 3.98 percent. The swap, whose rise reflects increased trader bets for higher interest rates, reached a four-month high on Aug. 10.

Traders have become increasingly confident the central bank will increase borrowing costs from a record low 3 percent after the peso sank to the weakest level since its re-denomination in 1993 on July 30. But the falling currency has yet to drive up consumer prices. The peso fell 0.9 percent to 16.5485 per dollar Wednesday after earlier touching a new intraday record.

Ricardo Medina, a spokesman for Mexico’s central bank, declined to comment on expectations for monetary policy.

Weak Growth

The inflation rate fell to 2.74 percent in July from a year ago, the lowest since 1968 and below the central bank’s 3 percent goal. And policy makers said last week they expect living expenses to remain close to their target for the rest of this year and in 2016.

Mexico’s $1.28 trillion economy will expand 1.7 percent to 2.5 percent this year, the central bank said last week. That’s less than its prior estimate of 2 percent to 3 percent growth.

Mexico’s statistics institute on Thursday will probably report that the economy grew 2.1 percent from a year earlier in the second quarter, according to the median forecast of analysts surveyed by Bloomberg, down from 2.5 percent in the first three months of year.

“The bank has been quite vocal about the fact that there’s little inflation in Mexico, and growth remains weak,” said Alonso Cervera, the chief Latin America economist for Credit Suisse Group AG. “It looks like the market is pricing in too many rate hikes.”

He recommends betting the two-year rate swaps will fall.

Despite the sluggish expansion in Latin America’s second-biggest economy, the central bank has indicated it will seek to maintain its rate advantage over the U.S. The gap between the rates is 2.75 percentage points, the least since Mexico adopted a new benchmark in 2008.

Still, Mexico’s struggling economy will keep the central bank from being too zealous in raising rates, said Barclays’s Oviedo.

“At the end of the day, the economy is still weak, and there’s no inflation,” he said.

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