NAFTA Nervousness Sends Mexican Peso Down 4%; Rates Rise

The Mexican currency fell sharply Tuesday as foreign investors pulled money out of the country amid jitters over the fate of the North American Free Trade Agreement.

The new peso lost 15 centavos against the dollar, or about 5%, to trade at 3.30 pesos in early dealings before firming later in the day to close at 3.27, down about 4%.

A senior Mexican official said there was nothing to worry about and scotched any idea of a devaluation. In a devaluation, a government officially lowers its nominal foreign exchange value for its currency.

“Has there been a devaluation? Absolutely false. There’s nothing to it,” the official said. “This is all within the normal range. There is nothing abnormal happening.”

Another high government source noted that the new peso recovered from its nervous beginning and was bolstered by an unexpectedly strong vote for NAFTA by the U.S. House Ways and Means Committee and good news about Mexico’s inflation.

“It is known that the Bank of Mexico will report 0.4% inflation for October, the lowest level in the last 25 years. This last news confirms that the fundamental elements of the economy continue to demonstrate great solidity,” the source said.

Analysts and traders nevertheless said $4 billion to $5 billion dollars have poured out of Mexico since the weekend as investors tried to limit their exposure in new pesos ahead of the do-or-die Nov. 17 vote on NAFTA in the U.S. House of Representatives.

The new peso trades within a band fixed by the Mexican central bank. The band stood at between 3.0562 new pesos to the dollar and 3.3092 Tuesday.

The peso slides against the dollar under a “crawling-peg” mechanism whereby the price at which the central bank buys pesos increases by 0.04 new centavos daily. Within those limits the central bank had been operating a narrower fluctuation band for the new peso, but Tuesday let it break out of the narrower band.

“Foreign investors have been reducing peso exposure as the NAFTA vote approaches and the central bank has decided to let the market put the peso where it should be within the intervention band,” said Carl Ross of Bankers Trust.

Interest rates--the government’s main weapon to ease pressure on the peso--jumped by 53% between the close Monday and Tuesday’s open.

Adding to the jitters was the prospect of a debate Tuesday night on NAFTA between Texas billionaire Ross Perot and Vice President Al Gore which could affect the treaty’s prospects for success or failure.

Traders and economists say Mexico’s central bank has dug into its estimated $23 billion of international reserves to defend the peso, which came under strong pressure last week amid concerns about a possible failure of the NAFTA.

But economists say foreign investors generally have much more faith in Mexico now than in the 1980s, when the country sparked an international debt crisis and the peso went into a nose dive.