By Vicki Schmelzer

NEW YORK (MNI) - The Mexican peso rallied though the psychological Mxn12.5000 level Wednesday, with dollar-peso falling to sixteen-month lows near Mxn12.4400, levels last seen in November 2008.

The peso gains were driven by a combination of improved risk appetite that served to underpin global emerging market currencies in general as well as by Mexico specific factors, analysts said.

"Mexico is certainly perceived to be both the laggard and the winner in the global recovery," said Rafael De Lafuente, chief Latin American economist at BNP Paribas.

The peso is therefore "seen as a likely winner," he said.

Nevertheless, long positions in the peso are getting extended.

"It's getting crowded though -- everyone likes it," De Lafuente said.

U.S. CFTC data released Friday, for positions as per March 9, showed that speculative accounts had a net peso long of 93,474 contracts or Mxn46.7 billion. The record net peso long of 125,000 contracts was seen in the first quarter of 2008.

Dollar-peso was trading at Mxn12.4450 Wednesday, with the pair down 6.1% from the 2010 high of Mxn13.2520, seen February 5.

In early February, the peso, like other emerging market currencies, suffered from expectations that the People's Bank of China might raise interest rates and choke off global growth.

In addition, there was overall risk aversion due to concerns about the eurozone peripheral countries.

With these fears increasingly allayed, at least for now, the market again embraced risk and bought emerging market currencies, especially the currencies of countries with growth potential.

In its Article IV consultation -- annual review of the Mexican economy -- released Tuesday, the International Monetary Fund said Mexico is starting to show a "strong cyclical recovery."

At the same time however, the IMF stressed that Mexico's economic improvement needs to be seen against the backdrop of a still-recovering global economy that means demand will not soon be back to pre-crisis levels.

The IMF staff growth forecast for 2010 of 4.0% year-over-year was unchanged from the January update of the World Economic Outlook, but the 2011 estimate was revised down slightly to 4.5% from 4.7%.

Reports this week that Mexico may soon auction a 30-year inflation- linked syndicated bond (Mxn 15 billion to Mxn 20 billion mentioned), has bolstered market sentiment toward the peso.

The new auction would come on the heels of a successful Mxn 25 billion 10-year syndicated bond auction in February.

Greg Anderson, currency strategist at Societe Generale, said another peso auction would be positive "from a sentiment perspective."

"It shows that Mexico is way past the fiscal jitters of last year," he said.

The stepped-up peso strength seen in recent sessions is "both a global emerging market story as well as a Mexico story," Anderson said.

Aside from the expected enthusiasm for the upcoming bond auction, attention also should be paid to Banxico's monthly 30-day dollar-put options auction, the latest of which will be held March 31.

In late February, the central bank announced plans to hold such auctions in order to build reserves, without disrupting the FX market.

The auctions -- which the central bank used from 1996 to 2001 -- will be held on the last business day of each month, and will offer $600 million.

There will be no predetermined exchange rate for the auctions which will use the interbank reference rate for the preceding working day "as long as that rate doe not exceed the average of the previous 20 working days," the commission said.

The FIX rate for March 16 was Mxn12.5254 and the FIX moving average (last 20 days) was MXN12.7360.

Societe Generale's Anderson noted that $505 million in options from the February auction have already been exercised -- not a surprise with these options now nicely "in the money."

"It is clear that the rest of them are going to be exercised and we are only half way through the month," he said.

If risk appetite for global emerging markets continues and the 30-year auction does indeed materialize, Mexican peso gains may "accelerate" toward Mxn12.2000 in coming sessions, Anderson added.

Clyde Wardle, currency strategist at HSBC, also saw scope for additional Mexican peso strength in the months to come.

"The market (Asian accounts especially) is enthused by the larger benchmark deals," he noted.

"But, global emerging markets is the main driver," Wardle said.

Last week, HSBC adjusted their end-of-year dollar-peso forecast to Mxn 12.2500, from Mxn12.9000, and also lowered its year-end core inflation forecast to 3.5% from 4.2%, "based on our revised view of a stronger Mexican peso."

HSBC moved back the expected start of Banxico tightening to the fall from July and now looked for the central bank to hike by 25 basis points in October and 25 basis points more in November."

The Bank of Mexico meets Friday and is expected to announce any monetary policy changes late in the morning. No change in rates is expected.

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