Bloomberg News

Hedge Funds Cut Bullish Peso Bets as Rally Wanes: Mexico Credit

June 21, 2011

June 21 (Bloomberg) -- Hedge funds and other investors are cutting their bullish bets on the Mexican peso by the most in 10 months on concern a slowdown in the U.S. economy will crimp demand for the Latin American country’s exports.

Wagers on the peso strengthening against the dollar outnumbered bets on a decline in the futures market by 48,163 contracts last week, down 47 percent from the same period ended June 7 and the biggest percentage decline since August, according to the Commodity Futures Trading Commission. The slump in the peso over the past month helped spark a 1.6 percent loss in dollar terms in local-currency Mexican government bonds, according to Bank of America Corp. Brazilian real-denominated notes gained 2.7 percent in the same period.

The peso is the second-worst performer among 25 emerging- market currencies tracked by Bloomberg over the past month, with mounting evidence of a U.S. economic slowdown snapping last year’s record rally. Foreign investment in the Mexican bond market and a jump in exports to the U.S. spurred a 13.4 percent advance in the peso over the past two years.

“The uncertainty of the recent months is increasing,” Eduardo Vazquez, an analyst at Harbor Intelligence in Monterrey, Mexico, said in a telephone interview. “In a base scenario, we predict that the cycle of appreciation of the peso has ended.”

The yield on Mexico’s benchmark notes due in 2024 rose 16 basis points, or 0.16 percentage point, to 7.19 percent this month, from a six-month low of 7.03 percent on June 1, according to data compiled by Bloomberg. Foreign investors poured $21.4 billion into the debt market in the six months through March.

Greek Concerns

The amount that bullish peso contracts outnumber bearish contracts has tumbled 64 percent from an all-time high of 134,129 on April 19, according to Washington-based CFTC. Futures are agreements to buy or sell assets at a set price and date.

The International Monetary Fund cut its 2011 forecast for U.S. growth for the second time in two months on June 17, predicting the economy will expand 2.5 percent this year, down from the 2.8 percent projected in April. Latin America’s second- biggest economy, which sends 80 percent of its exports to the U.S., grew 4.6 percent in the first quarter, less than the 5 percent median forecast in a survey by Bloomberg.

Concern that Greece may default is also curbing demand for higher-yielding emerging-market assets including Mexican stocks and bonds, said Aryam Vazquez, a New York-based economist at Wells Fargo & Co.

Euro-area finance ministers in Luxembourg on June 19 put off a decision on whether Greece will get the full 12 billion euros ($17 billion) promised for July and pushed for the nation to press ahead with budget cuts.

‘Risk Averse’

“There’s a more risk-averse climate worldwide that we’re seeing, primarily stemming off the crisis in Europe, and also deeper slowdown fears here in the U.S.,” Wells Fargo’s Vazquez said in a telephone interview.

The currency will strengthen 1 percent to 11.73 per U.S. dollar in the fourth quarter, according to the median estimate of 26 analysts in a Bloomberg survey.

Mauro Roca, an emerging-market strategist for Deutsche Bank AG, said the currency is likely to hold near current levels. He said the government is less concerned than regional peers about bringing dollars into the country and fueling gains in the currency. Roca forecasts the peso will end the year at 11.9 per U.S. dollar.

“The peso is attractive compared with other currencies in emerging markets,” Roca said in a telephone interview from New York. “It’s clearly a country where there is no risk of capital controls. The fundamentals for Mexico are still positive in terms of growth, economic institutions and subdued inflation.”

Rate Outlook

Annual inflation was 3.3 percent in May, up from a five- year low of 3.04 percent in March. May annual inflation in Brazil, Latin America’s biggest economy, was 6.55 percent.

Yields on futures contracts for the 28-day TIIE interbank rate due in January fell one basis point to 5 percent, indicating traders expect the central bank to raise the rate by then. Mexico is the only major Latin American nation to keep its benchmark lending rate unchanged in the past year. The central bank left the rate at a record low 4.5 percent last month.

The extra yield investors demand to hold Mexican government dollar bonds instead of U.S. Treasuries narrowed eight basis points to 139 at 5:45 p.m. New York time, according to JPMorgan Chase & Co.’s EMBI Global index.

Default Swaps

The cost to protect Mexican debt against non-payment for five years fell three basis points to 110, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

The peso rose 0.8 percent to 11.7775 per U.S. dollar. The currency is up 11.2 percent since the end of 2009, the biggest advance among Latin American currencies tracked by Bloomberg after the Colombian peso.

“An appreciation like that just isn’t sustainable in the long term,” Harbor’s Vazquez said. “The reduction in liquidity in international markets, slower growth in the U.S. and the problems in Greece are going to prevent a more favorable scenario from materializing.”

--With assistance from Ye Xie in New York. Editors: Lester Pimentel, Jonathan Roeder

To contact the reporter on this story: Jonathan J. Levin in Mexico City at

To contact the editor responsible for this story: David Papadopoulos at

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