Mexico's Peso Has Biggest Weekly Advance in Almost Two Years

By Michael J. Moore

Oct. 17 (Bloomberg) -- Mexico's peso had its biggest weekly gain since December 2006 amid speculation a global credit crisis may ease soon and as the central bank bought the currency to stem a two-month rout.

The peso gained 1.7 percent in the week, rebounding from a 14 percent tumble last week that was the biggest weekly decline since the Mexican government abandoned a currency peg in December 1994. The central bank bought $2.3 billion worth of pesos, following purchases of $8.9 billion worth last week that drew down foreign reserves from a near-record $84 billion.

``People are regaining some calm after these past couple weeks have been quite a roller coaster,'' said Mario Correa, an economist at Grupo Financiero Scotiabank Inverlat SA in Mexico City. ``It helps to know that Banco de Mexico seems to be willing to keep selling some more dollars to keep the exchange rate checked or behaving in an ordinate fashion.''

The peso fell 0.3 percent today to 12.8760 per dollar today, from 12.8343 yesterday. Mexico's currency traded at 13.0930 a week ago.

The central bank may stop using its foreign reserves to prop up the peso soon, central bank Governor Guillermo Ortiz said in an interview on the Televisa network yesterday. He said new peso purchases wouldn't be as large as last week's interventions.

The bank bought $6.4 billion worth of pesos on Oct. 10 alone. Reserves reached a record $86.9 billion on July 18, up 52 percent from three years earlier as a rally in oil, Mexico's biggest export, buoyed dollar inflows.

`Worse and Worse'

The central bank held its benchmark overnight lending rate at 8.25 percent today. A rate cut would have worked against the bank's efforts to prop up the peso, said Rafael Camarena, an economist at Banco Santander SA.

Concern that the economic slowdown in the U.S., the buyer of 80 percent of Mexico's exports, will lead to weaker growth in Mexico has pushed the peso down 23 percent from a six-year high on Aug. 4. U.S. reports on housing, consumer confidence and industrial production this week all signaled that the world's biggest economy is deteriorating faster than expected.

Mexican President Felipe Calderon plans to boost public spending next year to create jobs and spur growth, buffering the economy against the global slowdown. Lawmakers approved a bill Oct. 14 for part of the 2009 budget that proposes the largest deficit since 1990.

``The fact that the U.S. economy and therefore the Mexican economy will contract has largely been priced in,'' said Benito Berber, a strategist at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``People are not looking at the Mexican data, but at the U.S. data, and it keeps getting worse and worse, so that validates a lot of the level that we're at.''

Bonds Fall

Higher-yielding, emerging-market currencies such as the peso have been hammered over the past month as investors pulled out of carry trades amid the worst financial crisis since the Great Depression. In the carry trade, investors fund themselves with low-cost loans in countries such as Japan and invest in countries with higher interest rates.

The yield on Mexico's benchmark 10 percent peso bonds due in 2024 rose 31 basis points, or 0.31 percentage point, this week to 9.42 percent. The bond's price fell 2.69 centavos to 104.75 centavos per peso, according to Banco Santander SA.

To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net