Published On: Tue, Mar 10th, 2015

Mexican Peso keeps plummeting down

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Mexico’s peso fell to a record low on speculation U.S. interest-rate increases will reduce the appeal of higher-yielding emerging-market assets as the drop in oil prices damps the outlook for foreign investment.

The peso depreciated 0.6 percent to 15.5672 per dollar at 1:21 p.m. in New York after dropping to 15.6271, a level weaker than the low reached in March 2009 as a global recession throttled export demand along with inflows from remittances, tourism and investment. The pricing goes back to 1993, when the government of then-President Carlos Salinas de Gortari redenominated the currency to create what was called the nuevo peso.

 

Last year’s plunge in oil prices eroded optimism that the currency would benefit from new laws governing Mexico’s energy industry that were designed to spur as much as $250 billion of foreign direct investment by 2018. This year, the peso has extended its decline along with other emerging-market currencies as positive U.S. economic signs bolster wagers on a Federal Reserve rate increase by September.

“I’d expect for it to keep getting weaker,” Eduardo Suarez, a strategist at Bank of Nova Scotia, said by telephone from Toronto. “If you compare to the previous Fed tightening cycle, it was weakening up to the point when the Fed finally pulled the trigger, and that’s what I expect to happen again now.”

 

Fed Outlook

Futures trading indicates investors see a 64 percent chance of the Fed raising rates by the end of October, up from the projection of 47 percent at the end of January. The Fed has held its target for the federal funds rate at virtually zero since December 2008.

Nomura Holdings Inc. analyst Benito Berber said in a research note published Tuesday that the weakened peso may push annual inflation to about 3.5 percent by the middle of the year before it returns to the central bank’s 3 percent target.

While the peso is down 15 percent in the past six months, other currencies in Latin America have been hit even harder. Brazil’s real is down 26 percent in that span and passed 3 per dollar last week for the first time since 2004. Colombia’s peso is at the lowest since 2006 after falling 25 percent in the past six months.

The Mexican currency has fared better than other Latin American currencies because of laws enacted over the past two years that are expected to boost growth and attract foreign direct investment, said Suarez.

 

U.S. Payrolls

Adding to concern that the Fed will begin raising borrowing costs, the U.S. Labor Department reported Friday that employers added 295,000 jobs last month, compared with an increase of 235,000 forecast by economists surveyed by Bloomberg. The unemployment rate fell to 5.5 percent from 5.7 percent.

“Many investors hoped that with the U.S. economy on firm footing, Mexican assets would benefit,” Win Thin, the global head of emerging-market strategy at Brown Brothers Harriman & Co., said by e-mail March 6. The currency’s drop has been “very frustrating for Mexico bulls.”

 

Source: http://www.bloomberg.com/

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