Mexico Peso Posts Biggest Weekly Drop Since ’08 as Bonds Sink

Mexico’s peso posted its worst weekly slump since the global financial crisis in 2008 as speculation that the Federal Reserve will pare back monetary stimulus damped demand for the Latin American nation’s assets.

The currency fell 4.5 percent this week to 13.3050 per U.S. dollar at 4 p.m. in Mexico City, the biggest weekly decline since November 2008. It recovered 0.5 percent today. Yields on peso bonds due in 2024 rose nine basis points, or 0.09 percentage point, to 6.02 percent, pushing this week’s surge to 83 basis points.

Foreign investors, who had been buying Mexican peso bonds as an alternative to near-zero interest rates in developed countries, have been selling the securities as the Fed prepares to scale back its bond-buying program. Fed Chairman Ben S. Bernanke said June 19 that policy makers could end the $85 billion in monthly bond purchases if economic risks in the U.S., Mexico’s biggest trading partner, abate.

“All the movement that we’ve seen is attributable to this uncertainty that’s come about in the past month and that with the message of the Fed has become clearer,” Rafael Camarena, an economist at Grupo Financiero Santander Mexico SAB in Mexico City, said in a telephone interview. “We should be thinking that this is the end of an extremely accommodative monetary policy cycle and that going ahead we should see a cycle of normalization.”

Bernanke will cut the Fed’s $85 billion in monthly bond purchases by $20 billion at the Sept. 17-18 policy meeting, according to 44 percent of economists in a Bloomberg survey released yesterday. That compares with just 27 percent who said policy makers would start tapering in September in a June 4-5 poll.

Mexico’s central bankers were unanimous in their June 7 decision to hold the target lending rate at 4 percent, according to minutes of their meeting released today. One policy maker said investors had overreacted to the possible end of the Fed’s bond-buying program, according to the minutes.

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