Mexico Peso Trades Near Record Low on Economic Growth Prospects

By Valerie Rota

Oct. 24 (Bloomberg) -- Mexico's peso traded near a record low on concern the global economic slowdown will deepen, sapping demand for developing-nation exports.

The peso has plunged 18 percent in October, heading for its worst monthly performance since December 1994, when Mexico devalued its currency to keep the nation from depleting its foreign reserves. The peso has weakened as deepening financial turmoil pushes the world toward a recession and lowers the price of oil, Mexico's biggest source of dollars.

``Nobody knows how deep and how long this recession will be,'' said Mario Copca, a currency strategist at Mexico City- based Metanalisis SA. ``This uncertainty is making investors pull out of emerging markets.''

The peso fell as much as 5 percent to 14.0999 per dollar, from 13.4170 yesterday, when it touched a record low of 14.3017. It was little changed at 13.3842 at 5 p.m. New York time.

The peso's decline so far this month is the worst since the Mexican currency fell 48 percent in December 1994, sparking capital outflows in what became known as the ``Tequila Crisis.''

In an effort to stem the peso's rout, Banco de Mexico has bought $13.1 billion worth of pesos since Oct. 8. The peso snapped a four-day losing streak yesterday after the bank bought $1.1 billion worth of pesos in two separate auctions, its biggest single-day purchase in a week.

Mexico's peso will likely appreciate to as much as 12 per dollar by the end of this year, said Juan Carlos Lopez, head currency trader at Intercam Casa de Cambio SA in Mexico City.

Peso Demand

Investors will increase their demand for pesos through year-end as the U.S. Federal Reserve cuts its key lending rate, widening the spread with Mexico's benchmark, and after legislators agree to allow oil monopoly Petroleos Mexicanos to hire private companies to explore and drill for oil, Lopez said.

Mexican senators yesterday passed all seven bills based on an initiative proposed by President Felipe Calderon that aims to reverse declining production of crude. The lower house of Congress plans to vote on the measures next week.

The oil initiative allows companies that sign contracts for exploration and production to receive performance-based incentives, though it won't allow them to own Mexican oil or book reserves. The measures also don't change current laws that prohibit private companies from refining oil.

``This was a light reform,'' Copca at Metanalisis said. ``Its not going to substantially help even though it was a needed first step.''

Traders trimmed bets that the peso will gain against the dollar, figures from the U.S. Commodity Futures Trading Commission today showed. The difference in the number of wagers on an advance in the peso compared to those on a drop was 429 on Oct. 21, compared with 3,101 a week earlier.

Yields on Mexico's benchmark local-currency security rose for a ninth straight day, climbing to a 3 1/2-year high.

Bond Yields

The yield on the 10 percent security maturing in December 2024 increased 38 basis points, or 0.38 percentage point, to 11.4 percent, the highest since April 2005. The bond's price fell 2.63 centavo to 89.69 centavos per peso, according to Banco Santander SA.

Foreign holdings of Mexican fixed-rate securities maturing in a year or more have fallen 6.5 percent to 277 billion pesos ($21 billion) as of Oct. 15 from a record high on Aug. 12, according to the latest data posted on the central bank's Web site. Foreigners own one-fourth of the country's bonds, making them the biggest holders of the debt.

To contact the reporter on this story: Valerie Rota in Mexico City at vrota1@bloomberg.net