The Mexican peso tumbled amid a fresh bout of global risk aversion, supporting calls on Wall Street that the currency was set to fall after a torrid seven-month rally.
(Bloomberg) — The Mexican peso tumbled amid a fresh bout of global risk aversion, supporting calls on Wall Street that the currency was set to fall after a torrid seven-month rally.
The peso was among the worst performers globally on Thursday, weakening 1.8% to 17.33 per dollar in its fourth-straight drop as investors flocked to the greenback and sent long-term US yields higher. Dubbed the “super peso” during its ascent, the currency is now on track to post its worst week in 20 months with a loss of about 3.8%.
The losing streak is poised to continue as global investors grapple with a bigger-than-expected sale of US Treasuries, the implications of the US losing its AAA rating and the beginning of monetary easing cycles by some of the world’s main central banks.
“The peso may suffer for a while,” said Alfredo Puig, a trader at Mexican brokerage Vector in Monterrey. He sees it further weakening to about 17.57 per dollar before leveling off. “We expect this to be a short-term move, but the risk and the volatility the market is reflecting definitely affect the peso.”
The slump comes amid warnings from some strategists, including those at Goldman Sachs, that the currency is overvalued after this year’s run-up left it trading near an eight-year high. JP Morgan strategists pared their bet on Mexican peso bonds Thursday due to the risk that US Treasuries will rise even higher.
Read more: Goldman Adds to Calls on Overvalued Mexico Peso After Rally
Investors have been lured into Mexican assets by high interest rates, political stability and the so-called nearshoring trend. The central bank tightened monetary policy to a record high of 11.25% and is expected to lag peers in the rate-cutting cycle. As a result, the peso has gained around 12.5% this year, the most after Colombia’s peso and Sri Lanka’s rupee.
That rally had driven many investors into bets on further peso strength, which in turn amplified its losses this week as many ran for the door, said Shamaila Khan, head of emerging markets and Asia Pacific at UBS Asset Management Americas Inc.
“The valuation of the currency did not make a lot of sense to us,” Khan said. “That is now correcting with the market. It’s really the fact that it was a popular trade plus the valuations, which is why it’s underperforming today.”
What’s more, traders who’d picked the low-yielding Japanese yen to fund their peso bets are unwinding those positions after the Bank of Japan surprised investors last week when it edged closer to ending its extraordinarily loose monetary policy.
The yen-peso currency pair sank 2.4% for its worst day since March.
–With assistance from Zijia Song.
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