BNP Tells Traders To Exploit El Nino With Mexico Inflation Wager

Brendan Case at BloombergBusiness writes, "With Mexico’s inflation rate sinking to a nine-year low this month, bond traders are naturally showing scant concern consumer prices will pick up any time soon.

That’s a mistake to BNP Paribas SA. It’s predicting El Nino -- a global weather pattern that typically causes droughts, wildfires and floods -- will reverse a slide in agricultural prices and boost the inflation rate in as little as six months. The Paris-based bank recommends investors bet on cost-of-living expectations rising in the bond market.

BNP has history on its side as past El Nino episodes have pushed up global food prices and fueled the biggest inflation surges in Mexico and Brazil, according to a paper last month by researchers at the International Monetary Fund and the University of Cambridge. An increase in the cost of food, which accounts for more than 20 percent of Mexico’s consumer price index, would help push up annual inflation from 2.93 percent in the first half of May.

“El Nino will be a fundamental factor, as this will represent an exogenous shock to the Mexican market,” BNP fixed-income strategists Gabriel Gersztein and Gustavo Mendonca said in an e-mail. “The Mexican market is not isolated from the rest of the world, so a rise in agricultural prices will naturally impact food prices in Mexico, leading markets to price in this effect.” For the rest of the article see