Investors are propelling the Mexican peso, the world’s most expensive currency, to ever-increasing levels, disregarding risks from interest-rate cuts, contentious elections, and cautionary advice from analysts.
The Mexican peso stands out as the top-performing major currency globally this year, topping the list of real effective exchange rates compiled by Bloomberg. Deutsche Bank notes that this rate is currently at its peak in Mexico since at least 2005.
The relentless surge of the peso, surpassing one milestone after another, has left investors hesitant to bet against it, despite its steep valuation. Options market data indicate that traders perceive a strengthening of the currency as more probable over the next three months than a decline.
“In the past, we’ve attempted to oppose that strength, but it simply hasn’t yielded results,” remarked Nicolas Jaquier, a portfolio manager at NinetyOne UK Limited in London, expressing his confidence in the currency. “While it may appear overvalued on various models, we must consider that with caution.”
The peso’s resilience can be attributed to its low volatility and Mexico’s record-high interest rates, rendering it appealing for carry trade strategies, where investors borrow in one currency and lend in pesos.
Continuing its momentum from last year’s substantial gain, the peso has appreciated by 1.8% against the dollar this year, currently trading at approximately 16.69 per dollar, nearing its strongest level since 2015.
Despite looming presidential elections in Mexico and the US, some analysts advocate for prudence. Deutsche Bank warned of valuations nearing extremes, while Bank of America labeled the peso as “overvalued.”
However, leveraged hedge funds seem undeterred, increasing their net-long contracts on the currency significantly.
Although Mexico’s central bank is anticipated to reduce its key interest rate for the first time in three years, experts believe the pace of adjustment is unlikely to undermine the peso.
Mexico’s status as having the highest real interest rates in Latin America continues to attract money managers, making it prohibitively costly to bet against the currency.
Record remittances from the US, robust economic growth, and the prospect of increased investments from factories seeking proximity to the US market further support the peso.
With the expectation of continuity in Mexico’s leadership post-election, concerns primarily focus on the US election, where investors may hedge their peso exposure.
Despite past volatility surrounding US elections, the current administration’s policies, including threats of tariffs and trade tensions with China, could redirect investment towards Mexico.
“Mexcio will not face the same scrutiny it did last time, both from Trump and the market,” noted Dirk Willer, a strategist at Citigroup, emphasizing the dominance of the carry trade and the secondary concern of the US election in the short term.
