Mexico’s peso is reaching high after high, with traders ignoring warnings that it has become sharply overvalued.
(Bloomberg) — Mexico’s peso is reaching high after high, with traders ignoring warnings that it has become sharply overvalued.
The peso gained as much as 1.4% on Wednesday to its strongest level since 2015, rallying with global markets after US inflation data offered hope the US Federal Reserve would end its most aggressive interest-rate hikes in decades. It pared gains to trade about 0.9% higher versus the dollar as of 3:56 p.m. in New York, still one of the best performing Latin American currencies of the day.
The jump is nothing new for the currency, which is up almost 16% versus the dollar this year, trailing only the Colombian peso in emerging markets. The run — fueled by bets of a delayed easing cycle, the so-called nearshoring trend and strong remittances, among other factors — has earned it the moniker of ‘super peso.’
Earlier, data showed Mexican industrial production jumped more than expected in May, backing expectations that the Banco de Mexico will not be cutting interest rates anytime soon. That should continue to drive investors into the peso, said Christian Lawrence, a cross asset strategist at Rabobank.
“No one is going outright short the peso now,” Lawrence said. “We’re going to see rate cuts from Chile, from Brazil, and I just don’t think we will in Mexico.”
Mexico has been the most attractive bet for carry traders, when adjusted for volatility and liquidity. Its closest peer in Latin America, the Brazilian real, has seen bigger swings tied to expectations of an aggressive easing cycle ahead, making it less appealing. The real’s carry-to-volatility ratio is now at 0.52, compared to 0.68 for the peso.
“It’s about to get more attractive when you think about the potential flows from the rest of Latam,” Lawrence said.
Read more: Momentum Is Building for an August Rate Cut in Brazil
The peso’s real exchange rate recently hit its highest in nearly 15 years, according to one measure, and a chorus of analysts have said the currency has become overvalued amid the flows from investors who are seeking to milk the country’s interest rate differential to developed market rates.
BBVA Mexico strategist Miguel Iturribarria wrote in a note to clients that the peso had further momentum and should remain strong in the coming months, though he expected its stretched valuation to eventually favor a depreciation.
“We do not recommend shorting the peso just yet, since it is expensive because of its high carry and because we would expect a relative stable currency in the coming months,” Iturribarria wrote.
The peso has been supported by structural changes, including expectations of a flood of new investments as manufacturers move operations to the country to be close to the US market following the supply chain snags seen during Covid and deteriorating US-China trade relations. The currency has been further supported by record flows of money sent home by migrants, which is around $60 billion per year.
BNP Paribas strategist Marco Castro sees the peso slowly gaining more ground through next year, to end 2024 at 16.50 per dollar, from a current 16.88. The peso will “remain supported given our assumption of a shallow recession in the US and structural USD weakening,” Castro wrote in a July 5 note.
(Updates currency move in paragraph two, adds analyst comments beginning in paragraph nine.)
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