Mexico's Peso Rises on Investor Appetite for High-Yield Assets

By Valerie Rota

Nov. 3 (Bloomberg) -- Mexico's peso rose as falling global money-market rates boosted demand for higher-yielding assets.

The peso was the second-biggest gainer among Latin American currencies today after Chile's peso, and has risen 5 percent since touching a record low on Oct. 23. Money-market rates fell in Europe and Asia on speculation central banks will keep reducing lending rates to shore up growth.

``There is greater optimism that liquidity has made a comeback,'' said Mario Copca, a currency strategist in Mexico City at Metanalisis SA. This is making ``investors' confidence flow back toward emerging markets.''

The peso advanced 0.4 percent to 12.7775 per U.S. dollar at 5 p.m. New York time, from 12.8259 on Oct. 31, amid a rally in 15 of the 26 most-traded emerging-market currencies.

Today's advance comes after the peso posted a 15 percent decline in October, its worst monthly performance since December 1994, when the country abandoned a currency peg to keep from depleting its foreign reserves.

The peso has weakened 23 percent from a six-year high reached on Aug. 4 as the credit crisis drives the global economy toward recession. Banco de Mexico last month bought $13.1 billion worth of pesos to stem losses in the peso. The purchases have pushed down the central bank's reserves to $76.6 billion on Oct. 24 from a record $86.9 billion on July 18.

Peso Forecasts

Mexico's currency will trade at 12.42 pesos per dollar by the end of this year, according the average forecast of 33 economists surveyed by the central bank between Oct. 24-30. The monthly poll published today showed economists expect the peso to trade at 12.29 pesos per dollar by the end of 2009. In last month's survey, economists had forecast the peso to end this year at 10.67 per dollar and depreciate to 11.07 per dollar in 2009.

Mexico's inflation rate will surge to 5.84 percent by the end of this year before falling to 4.34 by the end of 2009, today's survey showed. That compares to previous year-end estimates of 5.63 percent and 4.07 percent for 2008 and 2009, respectively.

Mexico's benchmark peso-denominated bonds fell today after last week posting their biggest weekly advance since they were issued in 2005. Yields on the 10 percent security due in December 2024 rose 9 basis points, or 0.09 percentage point, to 8.96 percent. The bond's price fell 0.82 centavo to 108.81 centavos per peso, according to Banco Santander SA.

Foreign investors, the biggest holders of fixed-rate Mexican government bonds maturing in a year or more, trimmed their holdings of the securities by 5 percent to 269 billion pesos ($21 billion) as of Oct. 23 from a month earlier, according to the latest data posted on the central bank's Web site.

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