Mexican Central Bank's Actions Have Some Investors Thinking Turnaround

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December 14, 2011

Seeking a Bottom for Peso

Mexican Central Bank's Actions Have Some Investors Thinking Turnaround.

After driving the Mexican peso to its worst year against the U.S. dollar since 2008, investors are showing signs of reversing course.

For months, the peso has suffered along with other emerging-market currencies and riskier assets that aren't expected to perform as well if the global economy slows and Europe's debt crisis worsens. And, until last month, Mexico's central bank was steadfast in its resolve not to intervene in support, giving bearish investors free rein to push the currency lower.

But, on Nov. 29, the Bank of Mexico said it would support its currency by selling dollars in the event the peso weakened more than 2% in one day. For investors, this effectively put a floor under the peso. Some say the move was a turning point for the currency.

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Since the central bank's move, investors have ramped up bets in favor of the peso. Speculative investors nearly tripled their long positions, to 18,219 futures contracts as of Dec. 6 compared with a week earlier, according to the latest available data from the U.S. Commodity Futures Trading Commission. They also culled their "short" positions, which are profitable if the peso falls, by 8.6%, to 39,081 contracts.

One futures contract is equivalent to 500,000 Mexican pesos. Although most trading in the peso is done in the spot market, traders' futures positions reflect the broader market.

On Tuesday, 10 pesos bought 72.10 cents, down from 72.38 cents the day before. Although it is slightly up from the two-year low of 70.34 cents hit Nov. 25, it has fallen 15% since August and 11% this year.

The central bank's pledge to intervene if necessary gave investors an excuse to refocus on the peso's close links with the U.S. economy. Recent U.S. economic data has been surprisingly positive, boding well for Mexico's economy, which is expected to grow more than 3% in 2012.

"If you think the U.S. economy is going to continue its recovery…Mexican peso will do well," said Sara Zervos, portfolio manager of the International Bond Fund at Oppenheimer Funds, which is favoring the Mexican peso. "It's still one of our favorite currencies in the [emerging-market] world," she added.

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