Mexican Peso and Brazilian Real on Fiscal Positives

by on January 5, 2014 6:09 pm BST

The Mexican Peso rallied into the weekend on demand for local government debt due to the constitutional changes to open up Mexico’s energy industry to outside firms. On fixed-rate peso debt, yields on bonds maturing in 2024 fell five bps to 6.34 percent. This added to the weekly decline in yields of 15 bps, or .15 percent.

Demand for Mexico’s debt has risen after Standard & Poor’s increase Mexico’s credit rating to BBB+ (the third lowest investment grade rating). Also, demand for the peso increase due to the lack of volatility. According to Bloomberg data, the historical one-month volatility for the Mexican peso fell to 9.96 percent. “The peso has exhibited a lack of volatility at a time when other emerging-market currencies are showing higher volatility,” said Micheal Shaoul, CEO of Marketfield Asset Management LLC. Shaoul concluded that the lower volatility is drawing in investment capital.

The Brazilian real, too, seen demand after fiscal positives as the government exceeded their primary surplus target in 2013, according to Finance Minister Guido Mantega. The primary surplus, excluding interest payments, grew to 75 billion reais, roughly 1.5 percent of gross domestic product. The 2013 surplus target was 73 billion reais.

The real declined 13 percent on fiscal deterioration, but “we will continue with the fiscal effort to control expenses,” said Mantega. The real will need continued support through a program that will auction $200 million each trading day until June 30. It is also aiming to help limit import price increases.