EMERGING MARKETS-Mexican peso drops as cenbank warns of rate cut

Fri Jan 18, 2013 1:47pm EST

* Mexico central bank reverses policy bias, knocks down
local rates
    * Latam currencies drop as Intel outlook weighs on global
mkts
    * Mexico peso loses 0.5 percent, Brazil real drops 0.2
percent

    By Walter Brandimarte
    RIO DE JANEIRO, Jan 18 (Reuters) - Mexico's currency and
local rates fell on Friday after the central bank said it could
cut interest rates if inflation continues to cool and the
economy loses steam.
    The warning, issued after the bank's decision to keep
borrowing costs unchanged at 4.5 percent, reduced investors'
appetite for the Mexican peso, which fell half a percent
to 12.6565 per U.S. dollar. 
    "The peso reacted by depreciating," said Ezequiel Aguirre, a
strategist at Bank of America in New York. 
    "If the cut materializes, it will lower the 'carry'," he
added, referring to the so-called carry trade in which investors
borrow money in lower-yielding currencies such as the U.S.
dollar or the Japanese yen to buy assets denominated in
higher-yielding currencies such as the Mexican peso.
    Mexican rates also sold off after the central bank's
statement, which was an about-face from the previous guidance
suggesting an interest rate rise was coming. 
    The yield on Mexico's 2-year interest rate swap
, one of the most popular vehicles to bet on
monetary policy, bid nearly 12 basis points lower, on track for
its biggest one-day drop since last May.
    Despite the strong market reaction, many analysts consider
it unlikely that the central bank will actually lower interest
rates soon, just like it did not increase them after its
previous warning.
    "We believe that the Mexican central bank will remain
neutral in the coming meetings and no change in interest rate
will be implemented," Barclays analysts Marco Oviedo and Bruno
Rovai wrote in a research note. 
    "This balance of risks - higher downside global risks and
lower domestic inflation - is allowing Banxico to signal to the
markets that it is ready to use monetary policy to support
growth. However, we believe that additional economic growth data
is needed to trigger such action."
    Other Latin American currencies also weakened after a
disappointing earnings outlook from chipmaker Intel 
overshadowed stronger-than-expected economic data from China.
    The Brazilian real  dropped 0.2 percent to
2.0440 per U.S. dollar, nearing the upper limit of the narrow
range of 2.0-2.05 per dollar where it has been trading since the
end of 2012.
    Analysts bet, however, that the Brazilian central bank will
not allow the real to weaken much past 2.05 per dollar for fear
of inflation pass-through. 
    Those concerns increased after the bank's board said, in a
statement issued after their rate-setting meeting on Wednesday
night, that the inflation outlook worsened in the short term,
while economic activity continues to disappoint.
    The central bank's "post-decision communiqué acknowledges
the growing challenges faced by monetary authorities, which in
our view indicates that the central bank will keep its tight
grip on the exchange rate at least through the inflationary hump
expected in the first quarter of 2013," JPMorgan's analysts said
in a note to clients.
    
    Latin American FX prices at 1830 GMT:
    
 Currencies                         daily %    YTD %
                                     change   change
                            Latest           
 Brazil real                2.0440    -0.24    -0.20
                                             
 Mexico peso               12.6595    -0.51     1.62
                                             
 Chile peso               471.5000     0.13     1.53
                                             
 Colombia peso           1769.3000    -0.22    -0.19
                                             
 Peru sol                   2.5510    -0.12     0.00
                                             
 Argentina peso             4.9500     0.00    -0.76

 Argentina peso             7.4600     0.67    -9.12
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