Mexico Peso Volatility Rises Before Monetary Policy Decisions

Mexico’s peso volatility climbed as investors awaited monetary policy decisions this week from Banco de Mexico and the U.S. Federal Reserve.

One-month historical volatility, a measure of the magnitude of the peso’s fluctuations during the period, increased to 9.45 percent at 4 p.m. in Mexico City, the highest closing level since Jan. 8, according to data compiled by Bloomberg. The peso appreciated 0.7 percent to 13.3652 per U.S. dollar, its first advance since Jan. 20.

Swings in the Mexican peso increased before the two-day U.S. policy meeting starting tomorrow amid speculation over how quickly the Fed will move to reduce its $75 billion in monthly bond purchases. In Mexico, a pickup in inflation has been fueling bets that the central bank will consider raising borrowing costs from a record low 3.5 percent.

“Volatility will continue because of questions of monetary policy here and global risk aversion,” Eduardo Rodriguez, a trader at Casa de Bolsa Finamex SAB, said in a telephone interview from Guadalajara, Mexico. “We’re going to be waiting to see what the Fed says.”

The Fed will cut its purchases in $10 billion increments over the next six meetings before announcing an end to the program no later than December, according to the median forecasts of economists in a Bloomberg survey Jan. 10.

Mexican consumer prices climbed 0.68 percent in the first half of January, compared with the 0.60 percent median forecast of 20 analysts in a Bloomberg survey. Annual inflation quickened to 4.63 percent, above the 4 percent upper limit of the central bank’s target range.

Swaps traders now see a 60 percent chance of an increase in the 3.5 percent benchmark rate in the next year, up from 52 percent a month earlier, according to data compiled by Bloomberg. Banco de Mexico will announce its next policy decision Jan. 31.

Economic activity fell 0.04 percent in November from a year earlier, compared with a 0.80 percent increase forecast by economists surveyed by Bloomberg, the national statistics agency reported today. The nation’s preliminary trade surplus reached $1.7 billion in December, compared with the median projection of about $820 million, according to the agency.

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