Mexico peso hit by US fears, bonds up on rate view

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MEXICO CITY, Jan 8 (Reuters) - Mexico's peso weakened sharply on Thursday and stocks slipped on fears about the local impact of the U.S. recession, while bonds rose to nearly a nine-month high on hopes borrowing costs will soon come down.

The peso MXN=MEX01 weakened 1.52 percent to 13.645 per dollar as investors bet U.S. non-farm payroll data due on Friday would show the economy of the United States shed more than half a million jobs.

"Some investors are clearing positions ahead of the payroll report," said Mario Copca, an analyst at MetAnalisis consultancy in Mexico City. "Given Mexico's links with the United States, the outlook isn't good."

The U.S. recession will bring economic growth to a standstill this year in Mexico, which sends around 80 percent of its exports to its northern neighbor, Mexico's finance minister said on Thursday. For details, see [ID:nN08536339].

The central bank sold $226 million on Thursday in currency markets to prop up the battered peso. The currency lost 21 percent against the dollar in 2008.

Mexican consumer prices rose at the fastest pace in eight years in 2008, the central bank said on Thursday, but the results were close to market expectations. [ID:nN08527930]

Traders said energy price cuts announced by the government on Wednesday could help tame inflation, raising chances the central bank will cut interest rates soon to boost the economy.

"The government's action on energy prices is increasing the chances the central bank could act sooner than expected," said Ricardo Aguilar, an analyst at Invex brokerage in Mexico City.

Some analysts think the central bank could move to lower its key interest rate from 8.25 percent as soon as the end of next week, in its first monetary policy review of the year.

The government's benchmark 10-year peso bond MX10YT=RR rose 0.453 of a point in price, pushing its yield down 7 basis points to 7.59 percent.

In the equities market the IPC stock index .MXX closed down 0.73 percent at 21,955.4 points as retailers sank following weak sales reports in the United States and in Mexico by Wal-Mart de Mexico.

Shares in appliance and electronics chain Elektra (ELEKTRA.MX) lost 4.58 percent to 536.59 pesos while the nation's No. 2 retailer, Soriana (SORIANAB.MX), shed 4.8 percent to 27.98 pesos.

Top retailer Wal-Mart de Mexico (WALMEXV.MX) pared steep early losses to end down 0.38 percent at 34.14 pesos after the company's same-store sales fell 0.8 percent in December, its weakest monthly reading in 2008. (Reporting Michael O'Boyle and Noe Torres; Editing by Jonathan Oatis)