Bloomberg — Just days after the Mexican currency hit a five-year high against the dollar, the era of the so-called super peso may have come to an abrupt end.
The peso is down 5.9% since the banking crisis started on March 9, the worst performing among 23 major emerging-market currencies tracked by Bloomberg over that period.
The undoing of the peso comes from the turmoil in global banking that has pushed one-month implied volatility on the currency to 17.2%, the highest in more than two-and-a-half years. That’s undermined the appeal of Mexico’s high interest rates, the so-called carry trade when investors borrow in one currency to invest in another.
While the peso is still attractive with the key interest rate at 11%, it’s no longer the only choice — nor the obvious one — in emerging markets. Concerns that financial instability in developed economies is set to persist now make risk-adjusted carry better in Brazil’s real and the Colombian peso.
The peso has already lost its crown as the best performing emerging-market currency this year, with its gain of 1.7% slipping behind that of Chile’s peso, which is up 3%.
“The nearshoring theme, Mexico’s solid fiscal outlook and a good carry still justify a constructive view on the MXN, but we scrapped our longs and remain neutral — especially given US recession fears and the recent spike in global volatility,” said Guilherme Lemos, the portfolio manager responsible for the Latin America book at XP Asset Management.
It’s not just the surge in volatility that has hit the Mexican peso. Following the Silicon Valley Bank and Credit Suisse Group AG crises, traders are now questioning how much longer Mexico’s central bank can extend its tightening cycle.
The short-end of Mexico’s swap curve now shows an implied policy rate of 11.14% in six months, versus 11.55% only 30 days ago.
--With assistance from Vinícius Andrade
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