Bloomberg News

Mexican Central Bank Board Member Sees Years of Peso Volatility

July 09, 2012

Mexico’s peso may remain volatile for years as Europe’s sovereign debt crisis roils international markets, central bank Deputy Governor Manuel Ramos Francia said.

“We are going to be facing this volatility for some time,” Ramos Francia said in an interview in Cartagena, Colombia on July 6. When asked if that meant years rather than months, he said that it did.

The peso has lost 3 percent over the last three months to 13.317 against the U.S. dollar, the third biggest decline among major Latin American currencies. One-month historical peso volatility, a measure of fluctuations over the period, is 14 percent, the second-highest among major Latin American currencies after the Brazilian real, according to data compiled by Bloomberg.

While volatility will persist in line with European weakness, Mexico’s fundamentals didn’t support a peso weaker than 14 per dollar, Ramos Francia said. The currency dipped past that threshold briefly in early June and late May.

“Given some of these periods of high volatility and uncertainty, at some point some currencies -- and you have seen this pattern all over the emerging market economies -- overshoot in terms of adjustment,” he said. “In that sense, sooner or later they come back to reflect fundamentals.”

The European Central Bank on July 5 reduced its benchmark rate to a record low of 0.75 percent and took its deposit rate to zero, with President Mario Draghi saying the cuts may have only a “muted” economic impact. With Europe’s debt crisis curbing growth across the continent and damping the outlook for the world economy, the ECB was under pressure to ease policy.

‘Underlying Problems’

There are “underlying problems not solved in Europe,” Ramos Francia said. “In particular the core problems of competitiveness in the periphery. While those are not solved, the world economy is going to be in a complicated situation.”

The euro-region economy will contract 0.4 percent this year, according to 30 economists surveyed by Bloomberg. Economic growth in the U.S., which receives about 80 percent of Mexico’s exports, will be 2.2 percent, according to 70 economists’ forecasts.

Mexico’s gross domestic product will probably grow 3.5 percent to 4 percent this year, Ramos Francia said. The central bank’s official 2012 forecast in May was for GDP expansion of 3.25 percent to 4.25 percent.

Mexican inflation is “gradually converging” to its 3 percent target as slack in the labor market curbs wage growth, and credit expands at a sustainable pace, Ramos Francia said.

Inflation Conditions

“We have not only 30-year bonds, but we have even longer maturity bonds. That reflects precisely the core expectations that inflation is low and stable in Mexico,” he said. “Given that the domestic inflationary conditions are so well anchored, gradually general inflation is going to be absorbing these shocks to commodities prices and gradually converging to the 3 percent target.”

Prices jumped 4.3 percent in the 12 months through mid- June, leading economists to raise their year-end inflation forecast to 3.81 percent in a survey by the central bank published July 2. A month earlier analysts were forecasting inflation of 3.65 percent. The central bank targets inflation of 3 percent, plus or minus 1 percentage point.

Central bank Governor Agustin Carstens said in an interview on July 4 he expects annual inflation to dip into the target range this quarter.

To contact the reporters on this story: Matthew Bristow in Brasilia at mbristow5@bloomberg.net; Jonathan Roeder in Mexico City at jroeder@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net


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