Bloomberg News

Remittances Show Peso Rebound May Fuel Debt Rally: Mexico Credit

November 06, 2011

Nov. 4 (Bloomberg) -- Mexicans living in the U.S. are boosting the amount of money they send home at the fastest pace in five years, a signal to Citigroup Inc. and Moody’s Analytics that the peso’s slump may ease.

So-called remittances soared 21 percent in September from the year earlier, the most since October 2006, to $2.08 billion, the central bank said on Nov. 1. The peso is the biggest decliner among Latin American currencies, sliding 11 percent in the three months through yesterday and eroding returns in Mexican bonds. Peso debt posted a loss of 9.8 percent in dollar terms during the same period, compared with a 4.1 percent decline for Brazilian debt, according to Bank of America Corp.

The surge in remittances indicates more Mexican workers in the U.S., particularly in the construction industry, are finding work, said Alfredo Coutino, Latin America director at Moody’s. Construction spending in the U.S. increased in September for a second month after reaching an 11-year low in March, a Commerce Department report showed on Nov. 1. The U.S. economy, the destination of about 80 percent of Mexican exports, expanded at the fastest pace in a year in the third quarter.

“Mexico is receiving more dollars and that is going to have a positive impact on the peso in terms of softening the depreciation of the peso that we have seen,” Coutino said in a telephone interview from West Chester, Pennsylvania. The increase in remittances “is closely related to the fact that the U.S. economy reported a more defined recovery during the third quarter of the year,” he said.

Peso Rebound

The yield on Mexico’s benchmark peso bonds due in 2024 fell 11 basis points, or 0.11 percentage point, this week to 6.33 percent, according to data compiled by Bloomberg.

Mexican migrants sent home about $17.3 billion in the first nine months of 2011, compared with $16.2 billion during the same period last year, according to the central bank.

The increase in remittances may help spark a rebound in the peso, buoying local-currency Mexican government bonds, said Alejandro Urbina, who oversees $800 million of assets at Silva Capital Management in Chicago.

“If this European situation continues to settle down and there’s an opportunity for the market to focus more on the fundamentals or flows that are of importance too, then clearly that’s a good story for the peso,” Urbina said in a telephone interview. “If the peso does well, then you can expect the bonds to do well too.”

The peso rose 1.5 percent yesterday to 13.3333 amid speculation that Greece was moving closer to accepting a bailout. The currency declined 1.2 percent to 13.4901 per dollar today for a weekly drop of 3.6 percent.

‘Send Resources’

Migrants living in the U.S. are sending more money home to take advantage of the weakening peso, which slid to a more than two-year low on Sept. 23, said Sergio Luna, chief economist at Citigroup’s Banamex unit. Historically more than 95 percent of remittances to Mexico come from the U.S., according to the Washington-based Inter-American Development Bank.

“It would seem to signal that they’re making an effort to send resources, given the advantage in the sense that a dollar is buying more pesos,” Luna said in a telephone interview. “In a certain sense, the migrants are hedging. Perhaps they’re taking advantage of an arbitrage opportunity. At the end of the day, this should serve to limit the effect of depreciation of the peso.”

The peso will strengthen 5 percent by the end of March to 12.85 per dollar, according to the median forecast in a Bloomberg survey of 21 analysts.

Humberto Flores, 41, a deli worker in New York originally from Puebla, Mexico, said that he sent home almost twice as much money to Mexico in September to take advantage of the stronger dollar.

‘Longer Way’

“I wait until the dollar rises over there, so that it goes a longer way for my family,” Flores said in an interview in New York.

While the increase in remittances is “positive” for the Mexican economy and the peso, it’s unlikely to limit losses in the peso over the next month as Europe’s debt crisis remains the main driver for the exchange rate, said Benito Berber, a strategist at Nomura Securities Inc.

“I don’t think it’s going to be enough to cushion the move in the peso,” Berber said in a telephone interview from New York. “It does help, but the peso will move with the expectation of heightened contagion risks and what that means for U.S. growth and those kinds of outlooks. The market is just pricing in sort of a disorderly outcome in Europe.”

Greek Finance Minister Evangelos Venizelos said the nation won’t hold a referendum to accept its latest financial rescue. Prime Minister George Papandreou triggered a two-day rout in global stocks earlier this week after saying he wanted voters to decide on the country’s bailout.

Yield Spread

The U.S. economy will grow 1.7 percent this year, compared with 3 percent in 2010, according to the median estimate of 80 analysts surveyed by Bloomberg. Mexico’s expansion will slow to 4 percent this year from 5.4 percent in 2010, the Finance Ministry said Sept. 8.

The extra yield investors demand to hold Mexican government dollar bonds instead of U.S. Treasuries rose three basis points today to 213 at 3:15 p.m. in Mexico City, according to JPMorgan’s EMBI Global index.

The cost to protect Mexican debt against non-payment for five years rose two basis points today to 141, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

Yields on futures contracts for the 28-day TIIE interbank rate due in December fell five basis points yesterday to 4.70 percent.

‘Positive Piece’

U.S. construction spending climbed 0.2 percent in September. The U.S. economy expanded at a 2.5 percent annual rate in the period from July through September, the fastest in a year.

The increase in remittances is “a positive piece of news,” Coutino said. “It could reduce pressure on the peso in coming days unless the Greek problem deteriorates. It’s more like the confidence in the U.S. recovering that is going to be reflected in the Mexican economy through more inflows of remittances.”

--With assistance from Jonathan J. Levin in Mexico City. Editors: Lester Pimentel, David Papadopoulos

To contact the reporters on this story: Benjamin Bain in New York at bbain2@bloomberg.net; Nacha Cattan in Mexico City at ncattan@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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