Peso fall corners Mexico's central bank as outflows gain pace
By Michael O'Boyle and Jean Luis Arce
MEXICO CITY, June 14 (Reuters) - A precipitous slump in the peso and flight by investors from Mexican debt have put Mexico's central bank on the horns of a dilemma as it considers whether to hike interest rates in an effort to stop the peso's slide or stand pat.
Fund managers and analysts said either way the central bank runs the risk of igniting further selling of bonds.
While higher interest rates could deter currency speculators who have battered the peso, they also make hedging currency risk more expensive for bond holders.
On the flip side, not raising rates leaves unhedged investors without enough yield to compensate them for currency volatility.
Mexico saw the biggest outflow of investors from its sovereign peso bonds in 2-1/2 years in May, according to a Reuters analysis of Mexican central bank data, when the peso suffered its biggest monthly percentage drop against the dollar in four years.
The peso fell sharply again this week toward a record low of more than 19 per dollar. That could prompt the central bank to hike rates again as it did in February to defend the currency and contain inflation fears.
But such a move could backfire. Hedging peso exposure has become expensive for bond holders, and if they flee, a vicious cycle of currency losses and more outflows could follow.
"We are starting to see the nervous nature of investors," said Andrew Stanners, who helps manage $10 billion in emerging market debt at Aberdeen Asset Management in London. "They are looking for other opportunities." Continuación...