(Bloomberg) – The Mexican peso registered the best month in a quarter of a century as investors began to look beyond isolation measures globally and returned to their previous concern: the search for yield.
The peso, the most traded currency in Latin America, gained 9% in May, comfortably outperforming the rally of other major currencies. In emerging markets, the Russian ruble ranked second, with a gain of around 6%.
“The markets are returning to the performance-seeking dynamic that prevailed until the covid,” said Ilya Gofshteyn, strategist at Standard Chartered Bank in New York. “The Mexican peso still compares favorably in terms of carry.”
The carry trade is a bet on higher interest rates in the country and Mexico pays one of the highest in the world, both in nominal and real terms. The interest rate is currently 5.5% after the central bank resisted a loosening of monetary policy more quickly, and officials voted unanimously to cut 50 basis points for the third consecutive time on Dec. 14. may.
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Evolution of the Mexican peso in recent months. May was the best month in 25 years for the currency. Source: Bloomberg
“Despite the poor economic data, renewed optimism is making the carry trade more attractive again,” said Brendan McKenna, a strategist at Wells Fargo Securities LLC in New York. “The volatility of currencies in the emerging market world has been greatly reduced and the low volatility makes currencies associated with higher interest rates attractive again.”
The one-month implied volatility for the Mexican peso fell to 18.50% on Friday, a 12-week low. The indicator is also below the 100-day moving average for the first time in more than three months after rising above 40% in March. The downtrend means that the risk-adjusted return on the peso carry trade is more attractive now than it was a month or two months ago, although it remains well below pre-global pandemic levels.
The country’s economic outlook has darkened, and the central bank warned that Mexico could record the worst contraction in gross domestic product in nearly a century as the virus closures take their toll. Likewise, President Andrés Manuel López Obrador has resisted any large-scale fiscal stimulus or bailouts for large companies.
Despite the sober data, Gofshteyn says Mexico enjoys a clear advantage in a recovery scenario.
“The Mexican economy is exceptionally well positioned to benefit from the post-covid recovery,” he said. “Manufacturing is likely to recover faster than services, and trade tensions between the United States and China are escalating again at a time when trade uncertainty between the United States and Mexico is at its lowest point since before Trump “
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