What next for the Mexican peso?

It is no coincidence that the Mexican peso was slammed after President Obama’s re-election and Wall Street angst over a potential fiscal Grand Canyon.


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Published: Mon 19 Nov 2012, 9:56 PM

Last updated: Tue 7 Apr 2015, 12:04 PM

After all, if the politicians in Washington cannot hammer out a “kick the can” fiscal compromise, a 2013 recession in Estados Unidos/El Norte is inevitable. This is a worst-case macro scenario for Mexico, which has 13 million migrants in the US and 80 per cent of its exports headed to Gringolandia.

I have rhapsodised about the Mexican peso ever since the polls suggested that the PRI’s Pena Nieto would succeed Calderon as the next Mexican president, an event that acted as a catalyst for $30 billion in inflows into the tesebonos (peso government bonds) issued by Hacienda the most respected monetary institution in Latin America. As US data, from housing to payrolls, ISM to auto sales, strengthened, the Mexican peso soared against the dollar, its rise amplified by $109 Brent, Volatility Index at 12-14 and anti-inflation hawkishness from Banco de Mexico governor Carstens.

The Mexican peso was the world’s best performing currency against the US dollar in 2012, with a net dollar return of 12 per cent that investors who bought at my recommended rate at 14.50 in successive columns easily made on their peso investments. However, all good things come to an end, at least they do in the financial markets. I now recommend long US dollar — short Mexican peso for the time being at 13.10 for a 13.40 target. This is a countertrend position designed to take advantage of the risk aversion on Wall Street the tortuous politics of the fiscal cliff and the embryonic short Mexican peso futures positioning I see in the CME currency futures market in Chicago.

The Mexican peso is a classic risk appetite correlated currency since offshore investors own $73 billion or 52 per cent of the local peso government debt market. The Fed, ECB, BOJ and Bank of England QE3 policies make Mexican peso debt attractive for global investors, as Mexico offers four per cent GDP growth, a credible central bank with more than $200 billion reserves/IMF credit lines and 40 per cent of GDP public sector debt, metrics that are unthinkable even in the US, Germany or Japan. Of course, it does not hurt that the Banco de Mexico policy rate is now 4.5 per cent at a time when the Bernanke Fed overnight rate is 25 basis points until 2015. So there is no doubt in my mind that the secular, primary trend is for a higher peso especially as high labour costs in China, the Southwest’s high tech sunrise industries and PRI constitutional reform could attract $50 billion FDI in the state’s Pemex oil and gas empire. Mexico, not Brazil, is the new magnet for global capital in Latin America next year.

Is it the time to go long Mexican peso bonds or forwards? Absolutely not, hombres. The Mexican peso can well depreciate this winter as low as 13.50-13.70, levels where I would once again reenter the long peso trade for a target as high as 12 sometime in end December 2013. The Mexican central bank and the Hacienda want a stronger peso to offset rising inflation expectations, the monetary Achilles heel of Latin America. History will judge Felipe Calderon as one of the great emerging markets leaders, in the same league as Lula, Lee Kwan Yew and Jean Chretien. Since the peso is highly correlated with the Chicago Volatility Index risk aversion provides periodic lovely entry points. After all, the Mexican peso rose almost 10 per cent (in dollars) after I first recommended it in May when fear, not greed, swept Wall Street.

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