Forecasters predict surge in Mexican peso in early 2012

Ben Bain and Zachary Tracer
January 4, 2012

MEXICO CITY – The Mexican peso, Latin America’s most battered currency in 2011, is forecast to post the region’s biggest gains in the next six months as policy makers hold off on cutting interest rates amid improvements in the U.S. economy.

The currency will surge 4.6 percent by the end of June after an 11.5 percent drop in 2011, according to the median of 22 forecasts compiled by Bloomberg.

Yields on interbank rate futures contracts due September 2012 fell one basis point Monday to 5.06 percent, showing traders expect policymakers will raise borrowing costs that month from the current 4.5 percent, data compiled by Bloomberg show. Mexico was the only major Latin American country to keep rates unchanged last year.

Mounting evidence of a pickup in the United States, the destination for 80 percent of Mexico’s exports, is boosting the outlook for oil and manufactured goods from Latin America’s second-biggest economy. Speculation the U.S. can weather Europe’s debt crisis and a pickup in inflation helped reverse Mexican rate-cut bets last month and set off the biggest jump in yields on fixed-rate peso bonds since September.

“The market is pricing in that there won’t be additional interest-rate cuts,” said Ramon Cordova, a currency trader at Base Internacional Casa de Bolsa in Monterrey, Mexico. “There’s an expectation for inflationary pressures and that means rates will tend to stay the same or rise. That’s a good fundamental for the peso.”

U.S. employment figures and manufacturing data have supported a more positive view on growth in Mexico’s largest export market, according to Cordova.

As U.S. data improved, Mexico’s inflation quickened toward the end of last year. Prices increased 1.08 percent in November from October, the biggest monthly jump in almost two years. While the November price surge drove annual inflation up to 3.5 percent, the rate remains within Mexico’s target range of 2 percent to 4 percent.

A 2012 peso rally would mark a turnaround after declines sparked central bank measures to support the currency. Mexico’s currency-exchange commission said on Nov. 29 that the central bank would start auctioning $400 million of its reserves daily, a mechanism it last used to stem declines in the peso after the collapse of Lehman Brothers.

The announcement – which helped cause a 2.9 percent two-day rally in the peso – will prevent further declines, according to Pedro Tuesta, a Washington-based economist for Latin America at 4Cast Inc.

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