Mexico's Currency Rebounds After Central Bank Buys $1.1 Billion

By Valerie Rota

Oct. 23 (Bloomberg) -- Mexico's currency rallied after the central bank bought $1.1 billion worth of pesos.

The peso rebounded from a record low, snapping a four-day losing streak. Banco de Mexico's purchase at two auctions today added to the $12 billion of pesos it has bought over the past two weeks to stem a rout in the currency.

``The auctions definitely help,'' said Alonso Madero, who oversees 39.5 billion pesos ($2.9 billion) in assets in Mexico City at Actinver SA. ``Still, Banco de Mexico's auctions have been insufficient in fighting the market.''

The peso gained 3.3 percent to 13.4170 per U.S. dollar at 5:24 p.m. New York time, from 13.8790 yesterday. It rose as much as 4.7 percent, its biggest intraday gain since Oct. 13. Earlier the peso touched 14.3017, the weakest level since Bloomberg began tracking the data in 1971.

Mexico's currency maintained gains after senators voted to allow state-owned oil monopoly Petroleos Mexicanos to hire private companies to explore and drill for oil in an effort to reverse declining production. Oil is Mexico's biggest source of dollar flows and provides about 40 percent of government revenue.

Banco de Mexico bought the Mexican currency at an average price of 13.1877 per dollar at a sale of $1 billion and 13.7069 at a sale of $96 million.

Mexico's central bank has tapped foreign reserves to stem losses as investors pulled out of emerging markets. Reserves have fallen 9.4 percent to $78.7 billion in the week ended Oct. 17 from a record $86.9 billion on July 18.

`Risk Aversion'

Yields on Mexico's benchmark peso-denominated bond rose for an eighth trading day, reaching a 3 1/2-year high. Standard & Poor's lowered Russia's credit rating outlook to negative, while Argentine lawmakers battled to block President Cristina Fernandez de Kirchner from seizing privately managed pension funds as the government struggles to avert a default.

``Risk aversion is very strong,'' said Benito Berber, a strategist at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. This makes investors ``run toward the dollar at any price.''

Mexico will fail to grow next year as a slowing global economy erodes demand for commodities and curbs capital flow, wrote Nick Chamie, head of emerging-market research at RBC Capital Markets in Toronto, in a note to clients today. He had previously forecast a 3.3 percent expansion in Mexico for 2009.

Oil has fallen 20 percent from a year ago.

`Even Worse'

Yields on Mexico's 10 percent bond due in December 2024, the country's most actively traded security in pesos, rose 37 basis points, or 0.37 percentage point, to 11.02 percent, the highest since May 2005. The yield has climbed 2.12 percentage points since Oct. 13. The bond's price fell 2.65 centavo to 92.32 centavos per peso today, according to Banco Santander SA.

``The surge in yields on Mexico's long-term bonds shows investors are pricing in that the situation is going to get even worse,'' said Omar Martin del Campo, a trader at Banco Ve Por Mas SA in Mexico City.

Inflation unexpectedly quickened in the first half of October, Banco de Mexico said today. Consumer prices rose 0.49 percent in the first two weeks of the month after increasing 0.44 percent in the same period in September. Economists surveyed by Bloomberg News forecast consumer prices to rise 0.35 percent, according to the median of 16 estimates.

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