Traders betting on a rebound for Mexico’s peso are facing mounting challenges as the currency’s decline deepens. Once a standout performer in emerging markets, the peso has fallen over 3% against the dollar this week and nearly 14% in the past three months, marking it as the worst-performing currency among its peers. Its six-month implied volatility has surged to its highest level in three years.
On Wednesday, Citigroup abandoned its bullish stance on the peso, closing an overweight recommendation it had issued only a week earlier. Goldman Sachs & Co. also saw their tactical long position on the peso against the euro hit its stop level, while Barclays Plc’s recent recommendation to short the US dollar against the peso was stopped out within 48 hours.
Brad Bechtel, global head of FX at Jefferies Financial Group Inc., remarked, “The days of a stronger Mexican peso are behind us. It’s hard to navigate it at the moment unless you find tactical opportunities from time to time.”
The peso’s downfall is a sharp turnaround from its previous status as a top performer. The currency’s strength had once led investors to view it as nearly unassailable. However, confidence was shaken in June when Mexico’s ruling Morena party won a sweeping legislative victory, raising concerns about potential reforms proposed by President Andres Manuel Lopez Obrador. These reforms, including a judicial overhaul, are seen as risks to market stability and democratic integrity. Benito Berber, chief Latin America economist at Natixis, criticized the potential for anti-market reforms and weakening democratic institutions.
The currency’s troubles are compounded by the impact on Mexican stocks. Morgan Stanley downgraded local equities to underweight, citing the judicial reforms as a factor likely to increase Mexico’s risk premia and limit capital expenditure.
With a new congress set to take over next month and President-elect Claudia Sheinbaum assuming office in October, uncertainties loom over the country’s political future. Additionally, fears of a US economic slowdown and the possibility of Donald Trump’s return to the presidency further complicate the outlook. The trend of nearshoring and its impact on the peso is also under scrutiny.
Latin American currencies, in general, are experiencing increased volatility as traders unwind carry trades—investments funded by borrowing in low-interest currencies and investing in higher-yielding assets. Bank of America strategists have advised avoiding exposure to Latin American currencies and suggested short-term trades between different regional currencies.
Citigroup strategists have highlighted the erratic behavior of Latin American FX markets, noting that carry trades appear to be premature at this stage.
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