Mexico Peso Falls on Rate Outlook; Brazil Up: Latin Currencies

June 4 (<a href=quote.bloomberg.com>Bloomberg) -- Mexico's peso was headed for its biggest decline in five years after a deputy governor of the central bank suggested the bank may be ready to reduce interest rates as growth slows and inflation remains under control.

The peso fell 2.7 percent to 10.5710 per dollar in Mexico City and U.S. trading at 4:15 p.m. New York time. The peso last had a bigger one-day decline on Jan. 13, 1999, when it fell 3.9 percent. Brazil's real rose on the central bank's offer to sell interest rate swaps.

Jesus Marcos Yacaman, one of Mexico's four deputy central bank governors, last night told Bloomberg in an interview in Buenos Aires the national economy may grow less than the bank's forecast. Similar suggestions by bank officials have many investors expecting the bank to reduce interest rates by raising lending to banks, said Guillermo Estebanez, a currency strategist at Banc of America Securities Inc. in San Francisco.

They're basically saying that they'll tolerate lower rates,'' said Estebanez. All the factors that were supporting the peso, like the sales of reserve dollars, have worn out.''

Mexico's Central Bank Governor, Guillermo Ortiz, in April cut the forecast for economic growth this year to 2.4 percent from 3 percent, after raising interest rates five times since September. Economists expect the central bank to meet its target for inflation of 2 percent to 4 percent. Slow growth in the U.S., which buys 85 percent of Mexico's exports and accounts for 70 percent of the investment flowing into Mexico, has spurred investor concern South America's largest economy may sputter.

Yields

Lower inflation expectations have driven down yields on the country's benchmark 28-day Treasury note to an all-time low of 4.72 percent at yesterday's central bank auction, below the trailing 12-month inflation rate, making Mexican assets less attractive to overseas investors.

``Foreign banks have been the most active today buying dollars,'' said Omar Martin del Campo, a currency trader at Arka Casa de Bolsa SA in Mexico City. Martin del Campo said Citigroup Inc. and J.P. Morgan Chase & Co. have both been selling pesos.

Estebanez said he expected the peso market to focus on U.S. economic indicators such as Friday's payroll numbers and next Thursday's retail sales figures. He said indications of slower growth in the world's largest economy could accelerate the peso's decline.

Adding to the peso's decline, Mexico last month reported its trade deficit widened in April from a year ago on declining exports, which account for a quarter of its $600 billion economy.

Exports fell 5.7 percent from the same year-ago period, increasing concerns expressed by some investors that rising production costs and a stronger currency may hold Mexico's share of the U.S. export market at about 10 percent.

The peso future contract for June delivery, the most-traded on the Chicago Mercantile Exchange, fell for a second day, losing 2.9 percent to 9.4300 cents per peso from 9.7125 yesterday.

Brazil

Brazil's real gained for a second day after the government said it would sell investors more insurance against exchange-rate losses, reducing the chance companies will buy dollars to guard against a weaker real.

The real climbed 1 percent to 2.9160 per dollar, a three-week high, in Sao Paulo, boosting its gains in 2003 to 21 percent, the best performer of the world's 16 most widely traded currencies. Earlier, it rose to a three-week high of 2.8920.

The central bank sold $260.25 million nominal value of interest-rate swaps, known locally as cupom cambial, of $330 million it offered at an auction today. The government Monday refinanced 77.8 percent of the $1.4 billion of swaps due June 12.

Clearly the move is going to help the real, some may even interpret it as creating an anchor for the currency,'' said Flavio Farah head of the Treasury desk at the Sao Paulo unit of Dusseldorf, German-based Westdeutsche Landesbank Girozentrale. Still, I don't know why they're doing it, with all the money coming in there was no need.''

2002

Brazilian banks and companies have sold almost $6 billion of bonds abroad on increased investor expectations that South America's largest economy can pay its roughly $400 billion debt, helping the real strengthen. At the same time, a stronger real makes it more expensive for companies and investors to buy swaps, reducing the demand for the contracts, said Daniel Vairo, a trader at Opportunity Asset Management Ltda., which manages about 7 billion reais of stocks and bonds in Rio de Janeiro.

The swaps, along with dollar-indexed bonds, were sold in the past several years to protect the real from declines as investors pulled money from the country on concern Argentina would default or Luiz Inacio Lula da Silva, elected Brazil's president last year, would adopt policies that might bankrupt the country.

Bank Tally

All told, the central bank promised investors it would pay any currency exchange losses on $58 billion of investments. While the real's rally this year has turned central bank losses on the contracts into profits, the government says it wants to reduce the amount of the swaps held by investors.

``It seems to me it would be better to have the $300 million it could sell today available for later,'' Farah said.

Any such event might cause the dollar to surge against Brazil's real and require swap sales to limit declines, he added.

Brazil's benchmark 8 percent bond maturing in 2014 gained for the fourth day in six, adding 0.81 cent to 90.44 cents on the dollar, paring the yield to 10.35 percent, according to J.P. Morgan Chase & Co.

Regional Currencies

Argentina's peso rose for a fourth day, gaining 0.5 percent to 2.8225 per dollar, raising the currency's gains in 2003 against the dollar to 19 percent, the second-best performance among 59 currencies tracked by Bloomberg.

Colombia's peso rose for the third day in four, adding 0.2 percent to 2,844.00 per dollar, while Chile's peso fell for a second day, declining 0.3 percent to 715.05 per dollar.

Peru's new sol rose for a second day in three, adding 0.3 percent to 3.4820 per dollar. Venezuela's bolivar was fixed at 1,598 per dollar this year.