| | |  Business News | October 2009 
Mexico Peso Has Biggest Weekly Gain Since July on Budget Bets
 Andrea Jaramillo - Bloomberg
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October 09, 2009
Mexico’s peso had its biggest weekly jump since July on speculation President Felipe Calderon will win congressional approval for tax increases and spending cuts, helping the country avert a credit-rating downgrade.
The currency surged 2.5 percent this week, its biggest gain since the period ended July 17. It weakened for the first time in six days today, dropping 0.4 percent to 13.3070 per U.S. dollar at 5 p.m. New York time, from 13.2512 yesterday.
Lawmakers are debating the tax and spending cut proposals in Calderon’s 2010 budget bill as the deepest recession since the 1930s reduces tax collection and output falls at the state oil monopoly. Both Standard & Poor’s and Fitch Ratings have a negative outlook on Mexico’s rating, the third-lowest investment grade, on concern the drop in oil production will swell the budget deficit.
“We’re definitely seeing optimism with regards to the budget reform,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “Higher taxes will boost inflation, prompting monetary policy tightening next year. That’s also pushing gains in the peso.”
The government’s budget, submitted to Congress on Sept. 8, proposes tax law changes that would generate 176 billion pesos in additional revenue next year and spending cuts of 218 billion pesos. Lawmakers are due to approve a final budget by Nov. 15.
The central bank last month left the benchmark interest rate at 4.5 percent and said future decisions may depend on the inflationary impact of fiscal legislation in Congress. Policy makers are next scheduled to meet on Oct. 16 where they will likely leave the key rate unchanged, according to all eight economists in a Bloomberg survey.
The peso’s decline today came amid gains in the U.S. dollar after Federal Reserve Chairman Ben Bernanke said the bank is ready to tighten monetary policy once the economic outlook improves.
“Bernanke’s hawkish comments helped the dollar pause in its decline,” said Serebriakov. Still “as long as the dollar remains weak, the Mexican peso will continue to do well.”
Yields on Mexico’s 10 percent bond due December 2024 rose four basis points to 8.06 percent, according to Banco Santander SA.
To contact the reporter on this story: Andrea Jaramillo in Bogota at ajaramillo1(at)bloomberg.net (Last Updated: October 9, 2009 17:18 EDT)
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