Mexican peso more attractive than regional currencies in 2023: BofA and JPMorgan

The Mexican peso is about to score an outstanding 2023, while investors point to the safe haven elements of the currency with reason for optimism.

JPMorgan Chase & Co. and Bank of America Corp. are touting the Mexican peso as the most attractive currency bet in Latin America, impressed by Mexico’s stable political and fiscal positions, still-high interest rates, and proximity to the United States. For some, that turns this month’s peso drop into an opportunity.

“There is value in the Mexican peso at current levels,” said Brendan Mckenna, a currency strategist at Wells Fargo in New York, who expects the currency to strengthen to $19.50 per dollar in the coming months. “I also like the local political history in Mexico right now, there’s not a lot of political risk on the peso.”

The Mexican peso is one of the best performing currencies of the year among major currencies, posting a gain of more than 4% in 2022, even after a recent bout of weakness.

It has also performed well in terms of carry trades and this year has seen a return of more than 10% to investors who borrowed in low-rate dollar instruments to buy higher-rate peso debt, according to data compiled by Bloomberg. Only bets on the Russian ruble, the Argentine peso and the Brazilian real outperformed, although all of these currencies have much higher volatility than Mexico’s.

The country also has fiscal and current account deficits of 3.2% and 1.1% of gross domestic product, respectively, lower than those of peers with the same credit rating, according to data compiled by Fitch Ratings.

Speculators are already using the year-end plunge to increase bullish bets on the peso to the highest level since 2017, according to data from the Commodity Futures Trading Commission (CFTC).

Mexico will continue to stand out in terms of carry trade, external accounts and political risks, JPMorgan strategists Gisela Brant and Tania Escobedo wrote in the company’s annual outlook.

The country’s high interest rates of 10.5% also provide some support, even as traders expect the central bank to take a more dovish stance next year. Banxico, as the monetary authority is known, has raised interest rates by 6.5 percentage points since the beginning of its cycle of increases.

Finally, a group has emerged on Wall Street that sees an opportunity for the Mexican peso if companies move their operations to Mexico from Asian countries, a process known as nearshoring.

Citigroup Inc. is one of the firms saying the turnaround may already be underway, while Bank of America recommends investors bet on the Mexican peso and against the Chinese yuan to book trend gains.

“It’s a factor that will play out more gradually over the medium term,” said Barclays Capital Inc. strategist Erick Martinez, who favors the Mexican peso among other high-yielding currencies against the dollar in 2023.

With information from Bloomberg

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