Mexico Peso Implied Volatility Declines on Fed Stimulus Outlook

The Mexican peso’s implied volatility dropped to a seven-week low after a Federal Reserve policy maker said cuts in U.S. monetary stimulus that have bolstered demand for the Latin American country’s assets should be made gradually.

Three-month implied volatility on options for the peso, which reflect traders’ projections for price fluctuations, fell to 11.005 percent at 4 p.m. in Mexico City, the lowest closing level since Nov. 19, according to data compiled by Bloomberg. The peso gained 0.6 percent, the most among major emerging-market currencies tracked by Bloomberg, to 13.0184 per dollar.

Boston Fed President Eric Rosengren, the only dissenter against a Fed decision to taper bond buying, said in a speech today that the U.S. central bank should pare its monthly bond buying program “only very gradually.” Implied volatility in the peso surged to a one-year high in June amid speculation on how fast the Fed would reduce its asset purchases.

“It’s going to be stable this year,” Eduardo Rodriguez, a trader at Casa de Bolsa Finamex SAB, said by phone from Guadalajara, Mexico. “It’s going to appreciate gradually over the course of the year.”

Fed policy makers decided last month to taper monthly buying to $75 billion from $85 billion. They will probably reduce purchases in $10 billion increments over the next seven meetings before ending them in December, according to the median forecast in a Bloomberg News survey of economists after the central bank announced the tapering Dec. 18.

The peso will strengthen to 12.5 per dollar by the end of the year, according to the median forecast of 25 analysts surveyed by Citigroup’s Banamex unit. In the biweekly survey published today also showed analysts expect that Latin America’s second-biggest economy will expand by 3.4 percent in 2014 with an annual inflation rate of 3.9 percent.

Yields on fixed-rate securities due in 2042 fell one basis point, or 0.01 percentage point, to 7.58 percent today in Mexico City, according to data compiled by Bloomberg. In a weekly debt auction today, Mexico’s Finance Ministry sold 3.5 billion pesos ($269 million) of the 30-year bonds to yield 7.59 percent, according to the central bank.

The government also sold 7 billion pesos in 28-day Cetes, 10.5 billion pesos in 91-day bills, 11.5 billion pesos in notes maturing in 182 days and 11.5 billion pesos of those due in 336 days, according to the central bank. It also sold 600 million udis ($234 million) in inflation-linked debt maturing in 2040.

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