The Mexican currency looks strong and since the end of July, it has appreciated almost 10 percent against the dollar.
This quarter, the peso is widely outperforming its global peers, and analysts at Standard Chartered and Rabobank say the currency is poised to extend its rally through the end of the year.
Since the end of June, the peso has appreciated nearly 10 percent against the dollar, the best performance among the 140 currencies tracked by Bloomberg. The peso has also delivered the No.1 carry trade, which is the gains made by borrowing dollars and buying short-term peso-denominated securities – a reward for investors with the guts to buy pesos after a steep 18 percent decline. cent in the middle of a sell-off in the first half of 2020.
The peso has strengthened in recent months amid a pullback in the dollar, getting an additional boost from bets on a resurgence in the manufacturing sector and relatively high-interest rates in Mexico. The rally has created technical dynamics that point to higher profits going forward, and analysts say a more aggressive stance from the central bank should preserve the peso’s attractiveness to carry traders.
” The Mexican peso is attractive because of its financial and fundamental characteristics,” said Ilya Gofshtyen, a strategist at Standard Chartered in New York who predicts the peso will gain about 5 percent to end the year at 20 to the dollar. “The carry trade is, of course, a variable, but Mexico will also benefit from the recovery in global manufacturing and the strong rebound in the US auto sector in particular.”
Accelerating inflation has given policymakers little choice but to maintain one of the highest interest rates in the world, and economists surveyed by Citibank predict only a slight cut by the end of the year. In a world awash with liquidity and negative interest rates in many developed markets, Mexico’s benchmark of 4.5 percent has a lot of appeal for investors.
At the same time, the decrease in currency volatility is making long bets in pesos a safer option. One-month dollar-peso implied volatility decreased from 18.8 percent on June 30 to 14.7 percent at the end of July, and to 13.3 percent on August 31, the lowest reading since the end of January. This is combined with a 3.2 percent rally in the spot peso in July, followed by a 1.8 percent advance in August.
The dynamics helped the peso strengthen last week past its 200-day moving average for the first time since March. Christian Lawrence, an analyst at Rabobank in New York, says breaking the barrier gives the currency a clear path to 20 to the dollar.
The carry trade “still looks good, so the peso is doing well,” Lawrence said. He predicts that the currency could appreciate to 20 in October; however, potential increases in volatility could be a roadblock.
The biggest boost to the peso this quarter was the depreciation of the US dollar. But for the rest of the year, the main driver will be Mexico’s high-interest rates, according to Sacha Tihanyi, deputy director of emerging markets strategy at TD Securities in Toronto.
The strength of the peso will likely continue towards the end of the year, “but at a more moderate pace,” he said. “The appeal of performance for weight continues to be a very key feature of its performance.”