FILE - In this May 22, 2013 file photo, bundles of 500 peso bills are displayed to the press after they were found at the offices of a former state official in the capital city of Villahermosa, Tabasco state, Mexico. The cash was found in an office of Jose Saiz, who was finance secretary under former Gov. Andres Andres Granier of Pena Nieto's Institutional Revolutionary Party (PRI). Granier, the former governor of southern Tabasco state, was charged this week with money laundering and embezzlement and woke up Wednesday, June 26, 2013 in a Mexico City prison.

America Rocio, Associated Press - Ap

Federal Reserve's hints about easing stimulus pummel Mexico's peso

  • Article by: THE ECONOMIST
  • June 29, 2013 - 4:50 PM

Financiers in Mexico with a touch of gray in their hair vividly remember the last time the Federal Reserve abruptly tightened monetary policy, in 1994. It helped provoke the peso crisis that nearly drove the country into bankruptcy.

The lessons of that debacle have not been forgotten. Stability trumps everything. Economic growth and inflation are steady, debt is low and banks are well-capitalized. Yet like other emerging markets, Mexico is suffering from Ben ­Bernanke’s intention to roll back the Fed’s easy-money policy.

Although other Latin American currencies have been weaker for longer, the peso took the Fed chairman’s punch on the nose. Since early May, when speculation that the Fed is likely to rein in its bond-buying program increased, the currency has plummeted from below 12 per dollar to over 13. In the same period the yield on Mexico’s benchmark 10-year bonds has risen from a historic low of 4.4 percent to 6.2 percent, battering the Mexican pension funds that invest in them.

So far the feared exodus of foreign investors has not materialized. According to Banco de México, the central bank, there has been a $4.3 billion net outflow of foreign money from the stock market in the three months to the end of May. But the stock of foreign holdings remains historically high; several firms have raised money in recent days. Foreign holdings of government bonds have been relatively stable. Much of the peso’s volatility has been driven by investors hedging the currency risk on their fixed-income exposure rather than dumping bonds.

Craig LeVeille of the Chicago-based CME Group, where peso futures are traded, says investors with Latin American exposure may also have hedged in the Mexican peso market because it is more liquid than its peers in the region, exacerbating the currency’s slide.

One reason investors may be prepared to tread water in Mexico is that economic growth, which has been weaker than forecast so far this year, is highly dependent on demand in America. If the economy north of the border accelerates that would benefit Mexico, even if it also encourages Bernanke to “taper.”

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