Peso Enjoys Best Rally Since '93 Ben Bain and Jonathan J. Levin - Bloomberg News
go to original March 30, 2012

MEXICO CITY – Mexico’s peso is posting its biggest quarterly rally on record, boosting dollar-based returns on local bonds, as the quickening U.S. economic expansion fuels demand for the Latin American country’s oil, cars and cattle.

The peso has surged 9.3 percent to 12.7549 per dollar, erasing most of last year’s 11.4 percent slide and topping gains in all other major currencies. The rally, which has helped drive returns of 12.4 percent on benchmark bonds in dollar terms, marks the peso’s best quarter since the country reset the currency in 1993 after years of inflation over 10 percent. The Mexican bond returns compare with the average 4.5 percent gain in emerging-market local debt this year, according to Bank of America.

Mexico is benefiting from the acceleration in the U.S. economy, the buyer of 80 percent of its exports, after the U.S. mortgage lending crisis and sluggish growth drove the peso down 22 percent from 2008 to 2011, making it the worst-performing major currency. U.S. consumer confidence rose to a one-year high in March while jobless claims fell to the lowest since February 2008, helping fuel demand for Mexican goods that lifted its exports to a record in the first two months of the year.

“The fact that the Mexican economy is very tightly tied to the U.S., and the U.S. has surprised to the upside and many economists are ratcheting up their views for U.S. growth is clearly a positive for the perception of the peso,” David Bessey, who helps manage about $16 billion of emerging-market debt at Prudential Financial, said by phone from Newark, N.J.

The expansion in the world’s biggest economy will quicken to 2.2 percent this year from 1.7 percent in 2011, according to the median estimate of 72 analysts surveyed by Bloomberg. Mexico’s economy, the second biggest in Latin America after Brazil’s, may grow as much as 4 percent after expanding 3.9 percent in 2011, Banco de Mexico Governor Agustín Carstens said last week.

Yields on Mexico’s peso bonds due in 2021 have declined 26 basis points, or 0.26 percentage point, this year to 6.25 percent as investors anticipate inflation will remain in check even as growth picks up. Yields on similar maturity Brazilian debt have dropped 18 basis points in 2012 to 11.14 percent. The peso rally is luring foreigners to Mexican assets. International investors held 44 percent of local fixed-rate bonds as of March 16, up from 31 percent a year earlier, according to data compiled by the central bank.

The gains are a reversal of a sell-off in the second half of last year that prompted Mexico to start offering $400 million of foreign reserves daily to meet demand for dollars.

The peso tumbled 16 percent in the July-through-September period, its biggest quarterly plunge since 2008.

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