Bloomberg News

Mexico Peso Worst-From-First Slide Means U.S. Slump: Currencies

November 12, 2012

Mexico Peso Worst-From-First Slide Means U.S. Slump

The peso is vulnerable because Mexico, which depends on the U.S. for 80 percent of its exports, will expand 3.6 percent next year, the least since the 2009 recession, as President-elect Enrique Pena Nieto takes office, the median of 23 economist estimates compiled by Bloomberg shows. Photographer: Susana Gonzalez/Bloomberg

Mexico’s peso has turned from the world’s strongest major currency into the weakest of the past month amid growing investor concern the economy will slow as demand diminishes from the U.S., its biggest trading partner.

After strengthening 12 percent against the dollar since the end of May, the peso has weakened more than 2 percent, the biggest decline among 16 most traded currencies, according to data compiled by Bloomberg. X-Trade Brokers Dom Maklerski SA, the second most-accurate forecaster, says it will depreciate another 3.7 percent by September and Bank of Nova Scotia, the third-best, recommends selling the peso. Futures traders are cutting bullish bets at the fastest rate since June.

The peso is vulnerable because Mexico, which depends on the U.S. for 80 percent of its exports, will expand 3.6 percent next year, the least since the 2009 recession, as President-Elect Enrique Pena Nieto takes office, the median of 23 economist estimates compiled by Bloomberg shows. The past month’s losses surprised investors who bought Mexican assets to take advantage of the nation’s higher interest rates at a time when the Federal Reserve was debasing the dollar.

“The peso is really a very good indicator of the risk-on, risk-off mood that markets have been displaying lately,” Guillermo Ortiz, chairman of Grupo Financiero Banorte SAB and Mexico’s former central bank governor, said in a Nov. 7 interview in Mexico City. “All the uncertainties regarding the world economy, the fiscal outlook and so on and so forth, determine the appetite of investors.”

Foreign Demand

For much of this year, the peso advanced as international investors increased holdings of Mexico’s local fixed-rate bonds to a record 964 billion pesos ($73 billion) last month, or 52 percent of those outstanding, from 43 percent at the end of 2011, according to the central bank.

While the Fed, European Central Bank and Bank of Japan have cut borrowing costs to near zero or bought bonds since July 2009 to spur economic growth, Mexico central bank Governor Agustin Carstens has kept its benchmark at 4.5 percent, the only Group- of-20 nation to stand pat in that period.

Now, the currency is weakening as U.S. President Barack Obama negotiates with Congress to avoid more than $600 billion in mandated spending cuts and tax increases starting Jan. 1. The so-called fiscal cliff may drive the U.S. back into recession, according to the Congressional Budget Office.

‘Crowded Positioning’

Scotia recommended on Nov. 5 that its clients sell the peso, citing “somewhat crowded positioning” and “uncertainty” over U.S. debt talks and global growth. Morgan Stanley advises using options to buy insurance against a “deeper” sell-off.

X-Trade predicts it will decline to 13.71 per dollar by the end of September, from 13.2003 last week. There’s a 37 percent chance that the peso will trade at that level or weaker by Sept. 30, according to option prices compiled by Bloomberg.

The peso fell 1.2 percent last week against the dollar, the most since June. The currency’s decline handed an investor in Mexican bonds a 3 percent loss in dollar terms over the past month, according to data compiled by Bank of America Corp.

It fell 0.2 to 13.2207 per dollar as of 1:10 p.m. in Mexico City, trading at 2.6 percent below its 200-week moving average. The peso lost 9 percent in the three months after crossing below the moving average in August 2011.

The currency is moving against the consensus expectations of Wall Street strategists. The median estimate of more than 25 analysts surveyed by Bloomberg shows the peso will strengthen to 12.8 per dollar by Dec. 31 and to 12.4 by the end of 2013. JPMorgan Chase & Co., the most accurate forecaster, sees it at 11.9 by September.

Stronger Peso

Carstens signaled last week that a stronger peso would help curb inflation, which accelerated to 4.77 percent in September, the fastest since March 2010. Mexico’s currency has “solid grounds” to advance, he said in a Nov. 5 interview in Mexico City following the conclusion of G-20 meetings. Two days later, he said the “greatest concern” was that persistently “elevated” inflation would become more entrenched.

Economists predict the central bank won’t reduce benchmark interest rates in the next year, according to the median forecast in a Bloomberg survey.

“We like the fundamentals of Mexico and the peso is still attractively priced,” said Thomas Kressin, a senior vice- president and head of European foreign-exchange in Munich at Pacific Investment Management Co. The company, which oversees $1.9 trillion from its headquarters in Newport Beach, California, is betting the peso will rise against the dollar and the euro.

At an estimated 43 percent of gross domestic product, Mexico’s debt load compares with 107 percent for the U.S., according to the International Monetary Fund.

Higher Yields

The 5.33 percent yield on Mexico’s 6.5 percent bonds due in 2022 is more than three times higher than comparable-maturity Treasuries. The nation’s government debt has returned 11.5 percent this year, compared with 4.3 percent for sovereign bonds globally, according to Bank of America Merrill Lynch indexes.

Investors also bought the peso on speculation that Pena Nieto, 46, will follow through on plans by current President Felipe Calderon to boost the labor market. Pena Nieto, who takes office Dec. 1 after helping the State of Mexico win four credit- rating upgrades by Standard & Poor’s when he was governor from 2005 to 2011, has also said he will make tax collections more efficient and increase private investment in the energy sector.

Recent peso weakness shouldn’t “detract from the bigger picture, which is an incredibly competitive currency, a very supportive monetary and fiscal backdrop, decent economic data with growth likely this year to be close to 4 percent and sound public finances,” Adrian Owens, a money manager at GAM in London, said in a Nov. 8 interview. His firm is a unit of GAM Holding AG with $48 billion under management.

Fiscal Cliff

Owens favors betting on the peso against a basket of currencies made up of the New Zealand and Canada dollars, the pound and the euro. “I will be looking at any near-term weakness” in the peso “to add to that position,” he said.

Such views are increasingly at risk amid speculation that Mexico won’t be able to escape a U.S. slowdown. Even if the government defers the spending cuts and tax increases, economists have cut their 2013 growth estimates to 2 percent from 2.4 percent as recently as June, according to the median of more than 80 estimates compiled by Bloomberg.

The difference in the number of wagers by hedge funds and other large speculators on a gain in the peso versus a decline is shrinking, figures from the Washington-based Commodity Futures Trading Commission show. Net longs fell by 11,587 contracts to 114,422 last week, continuing their drop from 141,256 in the week of Sept. 25, the highest level since at least 1995.

Global Shocks

Peso weakness contrasts with gains in the Dollar Index (DXY), which measures the U.S. currency against six major trading partners and is up 2.7 percent since Sept. 14. That was a day after the Fed said it would print dollars to buy $40 billion of mortgage bonds a month in a third round of so-called quantitative easing.

The Fed added $2.3 trillion to the financial system in the first two rounds of QE, between December 2008 and March 2010, and from November 2010 through June 2011. The Dollar Index declined 4.6 percent during the first round and 3.9 percent in the second.

The peso is the most sensitive of any major currency to shocks to the global economy, based on the 30-day correlation with the Chicago Board Options Exchange Volatility Index (VIX), a measure of U.S. equity derivatives known as the fear gauge.

The currency depreciated 9.5 percent in May as the European debt crisis spread to Spain and Italy, and tumbled 12 percent in the two months after Standard & Poor’s stripped the U.S. of its AAA credit rating on Aug. 5, 2011, sparking a selloff in stocks around the world.

“The Mexican peso has more downside risk than upside risk,” Stephen Jen, managing partner at hedge fund SLJ Macro Partners LLP in London and the former head of currency research at Morgan Stanley, said in a telephone interview. “A lot of money has gone into the peso. I am skeptical.”

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Ben Bain in Mexico City at bbain2@bloomberg.net; Neal Armstrong in London at narmstrong8@bloomberg.net

To contact the editors responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net; Paul Dobson at pdobson2@bloomberg.net

The peso is vulnerable because Mexico, which depends on the U.S. for 80 percent of its exports, will expand 3.6 percent next year, the least since the 2009 recession, as President-elect Enrique Pena Nieto takes office, the median of 23 economist estimates compiled by Bloomberg shows. Photographer: Susana Gonzalez/Bloomberg The peso is vulnerable because Mexico, which depends on the U.S. for 80 percent of its exports, will expand 3.6 percent next year, the least since the 2009 recession, as President-Elect Enrique Pena Nieto takes office. Photographer: Susana Gonzalez/Bloomberg

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