December 11, 2014 / 9:31 PM / 6 years ago

CORRECTED-UPDATE 1-Mexico moves as peso near 6-year low, hedges add to pain

(Corrects date in last paragraph to Dec. 4, not Dec. 12)
    By Michael O'Boyle
    MEXICO CITY, Dec 11 (Reuters) - The Mexican peso slumped to
its lowest level in nearly six years on Thursday, triggering
central bank intervention and analysts expect even deeper losses
as foreign investors hedge record holdings of local currency
debt.
    The peso is down more than 4 percent since Dec. 4, its worst
six-session run in 1-1/2 years. On Thursday, it traded around
1.5 percent lower at 14.78 per U.S. dollar, a level that
triggered the central bank to sell $200 million at auction.
    Global markets have been sent into a tailspin after a sharp
drop in oil prices prompted the selling of riskier assets near
the year-end.
    Mexico is a top oil exporter to the United States, but its
economy is not overly dependent on crude, leading Mexico
watchers to say the peso is being unfairly punished.
    Still, lack of liquidity in the coming weeks could allow the
peso to fall much further.
    "I think there is some downside risk before emerging markets
can really stabilize," said Win Thin, head of EM currency
trading at Brown Brothers Harriman in New York.
    Chart watchers note the peso's sharp fall this year suggests
the currency could test the all-time low of 15.60 hit in March
2009. 
 
    After activating a dollar auction program this week, Mexican
central bank Governor Agustin Carstens said policymakers could
raise interest rates if the peso slump affects consumer prices.
    In contrast to the peso, the selloff in the peso-bond market
has been much less dramatic. That suggests funds are holding on
to Mexican bond positions while placing bets against the peso to
hedge their losses, analysts said.
    While many bond investors remain committed to the view that
a stronger U.S. economy will help Mexican growth, they are the
ones driving peso losses.
    "Perversely, this means there is going to be a sustained
pressure" on the peso, said Benito Berber at Nomura in New York.
           
    Global bond funds have piled into Mexico in recent years,
and foreign investors currently hold more than 2 trillion
Mexican pesos ($136 billion) of debt, or nearly 40 percent of
the outstanding local currency debt.
    The yield on Mexico's benchmark 10-year peso bond
 has risen only about 18 basis points since Dec. 4 to
bid at 6.10 percent on Thursday, still below the levels in
September.
($1 = 14.7230 Mexican pesos)

 (Reporting by Michael O'Boyle; Editing by Simon Gardner)
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