Mexico Becomes Traders’ Nightmare as Peso Slide Deepens
(Bloomberg) -- Traders trying to buy the dip on Mexico’s peso can’t catch a break.
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Local politics, the dismantling in so-called carry trades and concerns about the US economic and political outlook are disrupting bullish calls on what was until May the best performing emerging-market currency this year. The peso is down more than 3% against the dollar this week and almost 14% in the past three months, by far the worst among peers. Its six-month implied volatility has jumped to near the highest in three years.
Citigroup on Wednesday closed an overweight recommendation on the peso that it had opened just last week. It’s also now past the stop level assigned by Goldman Sachs & Co. strategists on an Aug. 9 “tactical long position” on the currency versus the euro. Barclays Plc, which recommended clients short the US dollar against the peso at the end of last month, saw the currency hit the trade’s stop-loss level in about 48 hours.
“The days of a stronger Mexican peso are behind us,” said Brad Bechtel, global head of FX at Jefferies Financial Group Inc. “Hard to play in it at the moment unless you get some tactical opportunities from time to time.”
It’s a stark reversal for the currency which until a few months ago was by far the best performer in emerging markets — one whose strength seemed so unshakable investors feared betting against.
Faith in the so-called “super peso” was rattled in June when the ruling Morena party won legislative elections in a landslide. The outcome surprised investors, who rushed to dump the peso on concern a swath of reforms presented by President Andres Manuel Lopez Obrador — including an overhaul of the judicial system that could erode limits on the ruling party’s power — would be implemented.
“Morena and AMLO seem determined to pass anti-market reforms, including the judicial reform and other reforms that will weaken the democratic system,” said Benito Berber, chief Latin America economist at Natixis.
The concerns are also taking a toll on Mexico stocks. On Tuesday, Morgan Stanley downgraded local equities to underweight, saying replacing the judicial system should increase “Mexico’s risk premia and limit capex.” Bank of America analysts led by Carlos Peyrelongue reiterated the firm’s “defensive” stance in the stocks citing a busy political calendar in coming months.
Mexico’s new congress takes over next month, while President-elect Claudia Sheinbaum will be sworn in in October. The new political landscape adds to fears around a potential sharp slowdown in the US, the country’s biggest trading partner, as well as odds the so-called nearshoring trend grounds to a halt if Donald Trump wins presidential elections in November.
At a press conference Wednesday, Sheinbaum said investors shouldn’t be concerned about the judicial reform. “Mexico is sovereign and investors shouldn’t have any concerns,” she said. “On the contrary, we are going to have a better justice system in Mexico. Those who know the judiciary, including investors, know about the corruption there.”
The peso fell as much as 2.2% against the dollar before trimming losses to 1.5% — still was the worst performing major currency on Wednesday. It’s on track for a first weekly loss in three.
Other currencies in Latin America have also seen heightened volatility as traders rush to unwind carry trades — in which investors borrow in currencies where interest rates are low and park the proceeds in riskier assets where rates are high. The region’s double-digit interest rates had made it a preferred spot for yen-funded carry trades for the past few years.
Bank of America strategists Ezequiel Aguirre and Christian Gonzalez Rojas told clients to avoid exposure to Latin America and favor trades with weak correlation with global risk, according to a note sent last week. They recommended selling the Chilean peso relative to the Colombian peso in the short term, and selling the Peruvian sol against an equally-weighted basket of US dollar and Chilean peso.
“LatAm FX continues to trade erratic, decorrelated not only with the global mood, but among peers themselves,” wrote Citigroup strategists including Ernesto Revilla and Luis E Costa in a note Wednesday. “Carry trades at this stage proved to be a bit premature.”
--With assistance from Travis Waldron and Alex Vasquez.
(Updates MXN moves in second and 11th paragraph, adds Bank of America’s stance on Mexican stocks in 8th paragraph.)
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