| | |  Business News | July 2008 
Mexico's Currency Trades Near Strongest Since 2002 on Rate Bets
 Valerie Rota - Bloomberg
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Mexico's peso traded near its strongest since 2002 on bets central bankers will raise the benchmark lending rate in August for a third straight month to curb the fastest inflation in more than three years.
The peso has gained 2.6 percent since June, heading for its biggest monthly advance since October. Three interest-rate increases by Banco de Mexico since last year and seven rate cuts by the U.S. Federal Reserve have swelled the spread between the two benchmark rates to 6 percentage points, the most since 2005.
"Expectations of another rate increase are pushing the peso toward 10 per dollar," said Mario Copca, a currency strategist at Metanalisis SA in Mexico City.
The peso was little changed at 10.0522 per dollar at 5:30 p.m. New York time, from 10.054 yesterday. It touched 10.003 per dollar last week, the strongest since October 2002.
Banco de Mexico will raise its key lending rate to 8.25 percent from 8 percent when policy makers meet on Aug. 15, according to the median forecast of 23 analysts in a Citigroup Inc. survey published last week.
Speculation the Fed will raise borrowing costs in the coming months to curb quickening inflation may push the peso to 10.6 per dollar toward year-end, Bank of America Corp. economist Edgar Camargo said.
Interest-rate futures show traders see a 63 percent chance the U.S. central bank will increase its key rate by at least a quarter-percentage point from 2 percent at its Oct. 29 meeting.
Carry Trade
"There are still inflationary pressures in the U.S.," Mexico City-based Camargo said in a telephone interview. Expectations of an increase in U.S. interest rates "can subtract some driving force from the carry trade."
In so-called carry trades, investors get funds in a country with low borrowing costs and invest in one with higher rates, earning the spread between the two.
A drop in the price of oil, Mexico's biggest source of dollar flows, declining production at Petroleos Mexicanos, the state-run oil monopoly, and slowing demand for Mexican exports from the U.S., the country's biggest trading partner, may also spur a weakening of the peso, Camargo and Lawrence Goodman, head of global emerging-market currency strategy at Bank of America, wrote in a research note to clients.
Yields on Mexico's 10 percent bond due December 2024 rose the most in nearly seven weeks on expectations Mexican central bankers will increase their inflation forecast for the second half of 2008 to above 5 percent, Copca at Metanalisis said. The bank, which targets inflation between 2 percent and 4 percent, is scheduled to publish its quarterly inflation report tomorrow.
The yield on the country's most-traded security rose 18 basis points, or 0.18 percentage point, to 8.96 percent. It was the biggest increase in yield since June 12. The bond's price fell 1.62 centavos to 108.88 centavos per peso, according to Banco Santander SA.
To contact the reporter on this story: Valerie Rota in Mexico City at vrota1(at)bloomberg.net |
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