Mexico’s Peso Falls as Energy Reform Letdown Adds to Fed ConcernJonathan Levin
Mexico’s peso fell on speculation the U.S. Federal Reserve will curb stimulus, adding to losses that started after President Enrique Pena Nieto didn’t go as far as a rival party in a proposal to loosen the state oil monopoly.
The peso declined 0.3 percent to 12.7241 per U.S. dollar at 4 p.m. in Mexico City, dropping for the third straight day. The currency has retreated 0.8 percent in the past two days, paring its advance this year to 1 percent, still the most among the dollar’s 16 most-traded counterparts tracked by Bloomberg.
Speculation is growing that the Fed will start tapering record stimulus after retail sales in the country rose in July for a fourth consecutive month, helping prompt the dollar to strengthen against all 16 of its most-traded counterparts. The peso is also reacting to Pena Nieto’s energy reform proposal yesterday, which contained fewer incentives for private oil companies than his main political rival party had put forth.
“The move signals slight disappointment over the details of the proposal, with investors probably expecting a more aggressive plan,” Juan Carlos Alderete, a strategist with Grupo Financiero Banorte SAB, said in an e-mailed report today.
The peso pared losses after Deputy Energy Minister Enrique Ochoa said in an interview in Mexico City that Pena Nieto will also push for a rule change to allow registration of contracts’ value, which will then be converted into volume and booked as reserves under U.S. Securities and Exchange Commission regulations for risk-sharing accords.
The peso rallied 5.9 percent from a 10-month low on June 20 through last week, the most among developing nation currencies tracked by Bloomberg.
Pena Nieto’s plan would limit producers to profit-sharing contracts that provide less control over the oil than concessions proposed by the largest opposition party, the National Action Party.
Banco Santander SA analysts David Duong and Alejandro Rivera said in a note to clients today that Mexico’s fixed-income and foreign-exchange markets “could trade under pressure until the prospects for an agreement become more evident.”
Yields on benchmark peso bonds due in 2024 surged 0.17 percentage point to 6 percent, according to data compiled by Bloomberg.
“It’s not strange to me that some would have wanted a regime with concessions where assets or oil profits are transfered to investors, but I think this is a model that keeps the property and profit and that will allow us to attract capital to develop the sector,” Finance Minister Luis Videgaray said today in an interview with MVS Radio, according to a transcript.
Citigroup Inc. analyst Julio Zamora said in a note to clients today that while there were some aspects of Pena Nieto’s proposal that could be improved, “we believe the benchmark of attracting additional investment has been met.”