The Mexican peso reached its highest level in almost five years against the dollar this Friday the 17th — a feat rivaled only by the much more stable Swiss franc — just over a week after the central bank unexpectedly raised its key interest rate by half a percentage point. However, few think that the rally will continue for long.
currency now It’s up 6% year-to-date and is currently trading at its highest level since April 2018.
While February’s rate hike boosted the currency’s risk-adjusted return, it is just one of many factors behind the stellar weight performance in the last five years.
Inflation in Mexico accelerates above expectations
On Thursday, Bank of America highlighted in a report the narrow current account deficit, fiscal restraint, political stability and nearshoring, as the relocation of production facilities closer to the final market in the United States is known. Even so, the path to further appreciation seems challenging.
“MXN offers a good carry, but its value has stretched”, said Jens Nystedt, a senior portfolio manager at Emso Asset Management US LLC in Greenwich, Connecticut.
Citigroup strategists Dirk Willer and David Glass recommend last week after Banxico’s surprise rate hike, a 1% overweight in the Mexican peso versus a 0.5% underweight in the Colombian currency.
Trading long-short will generate positive carry and prevent event risk that could trigger a dollar rally.
Even so, the US bank revised its forecast for the peso this week and expects the currency to “hold stable in general terms” in the short term before embarking on a path of gradual depreciation over a twelve-month horizon.
Citi now expects the peso to close 2023 at a level of 20.1 per dollar, down about 8% from current levels, though still stronger than the bank’s previous estimate of 20.4 per dollar.
Capital Economics projects that weight overperformance reverses soon and for the currency to “fall sharply against the dollar” as the US weakens later this year.
Mexican peso strength
Mexico’s trade-weighted exchange rate, adjusted for inflation, is now much stronger than their five- and ten-year averages.
“MXN valuation is historically rich in real terms”, Bank of America wrote yesterday in its research report, concluding that the peso is now 6-11% overvalued relative to medium- and long-term fundamentals. Recently, the bank’s position regarding the Mexican currency has become neutral.
LM PC
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