Mexico Peso Implied Volatility Rises Amid Rate-Cut Expectations

The Mexican peso’s implied volatility rose to a one-week high as analysts forecast policy makers will lower borrowing costs for a third time this year to shore up growth in Latin America’s second-biggest economy.

One-month implied volatility on options for the peso, which reflects expectations for future price fluctuations, rose to 11.41 percent at 4 p.m. in Mexico City, according to data compiled by Bloomberg. It’s the highest closing level since Oct. 15. The currency increased 0.2 percent today to 12.9669 per dollar.

The central bank will lower the target lending rate by a quarter-percentage point to a record low 3.5 percent tomorrow according to the median forecast of economists surveyed by Bloomberg. The rate was cut by a quarter point last month and a half point in March,

“In theory this should cause a depreciation in the exchange rate,” Mario Copca, a currency and fixed-income strategist at said by phone from Mexico City. “At the same time it should generate more implied volatility in the options market.”

The national statistics agency reported today that a proxy for economic activity climbed 0.84 percent in August from a year earlier, slower than the 1 percent median forecast of analysts surveyed by Bloomberg.

While Mexican consumer prices increased 0.4 percent in the first half of October, more than economists projected, annual inflation slowed to 3.27 percent, approaching the central bank’s 3 percent target.

Yields on inflation-linked bonds maturing in December 2014 rose three basis points to minus 0.54 percent.

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