And now for something completely different : the Mexican Peso .... except it isn't.

Thursday 23rd June 2016

And now for something completely different : the Mexican Peso .... except it isn't.

ref : "Short View" by Stephen Foley , the Financial Times , Companies & Markets

Now that Referendum Day is finally upon us, and the politicians and pundits can do no more to sway the British public, you'd think it was a great opportunity  --  a relief, even  --  to have a look at something else at last .... the punch-bag of the currency markets the Mexican Peso, for example.

Over the last two years the Peso has lost about 40% of its value versus the US dollar and this year is the worst-performing of the major traded currencies, worse even than the British Pound. It has struggled with any number of problems both Mexico-specific and relating to its position as by far the most liquid of emerging market currencies, trading about $135bn each day. Consequently, it has become representative of the sector so if someone wants to short emerging market currencies for example (and there's been quite a lot of that going on over the last year or so), they can most easily do so by selling the Mexican Peso. But for all the reasons why one might want to short the currency, it is not immediately apparent why Britain's decision on whether to remain in the EU or not should be one of them. It is though, and it was the main driver behind the Peso's latest bout of weakness.

Some background is probably in order .... As a large oil producer, it's easy to see why Mexico's currency has been on the rack during oil's precipitous decline. In particular, the damage done to the state-owned oil company Pemex and the knock-on effect it has on government spending has severely undermined expectations of economic growth. Logically however, oil's recovery from below $27 per barrel to above $50 should also have engineered a rally in the Peso. That it hasn't is in large degree down to a wall-building, tub-thumping Donald Trump and his unexpected triumph in the US Republican primaries.

If both the oil price and the actions of Mr Trump are out of Mexico's control, so is the Peso's role as an emerging-market proxy. In this "Risk-on / Risk-off" world, any time that nervous investors react to uncertainty by unloading emerging markets in a rush to a more "Risk-off" position, the Peso bears the brunt of the selling. The apparent incongruity of the Mexican Peso moving with increasing correlation with the British Pound (you wouldn't think normally that the two have much in common) is the latest example of  this : Brexit would obviously push the Pound much lower, but it would also shake confidence globally which would be damaging to emerging markets and their currencies, and as we've seen to the Mexican Peso in particular.

It all seems a touch unfair on the old Peso, which has assumed the mantle of a hedge for just about anything..... but then markets aren't fair. It's certainly an irritation to the authorities in Mexico City who were forced to hike rates in February to defend the peso and penalize speculators when the rate went over 19 to the dollar. We're near that level now, although the latest Brexit polls favouring a "Remain" verdict have alleviated the problem somewhat (USD / MCN currently 18.27). Mexico will very keen that that verdict is realised ....which is odd, really  --  not so long ago you couldn't imagine Mexicans caring too much either way.

Brexit note :

Regulars will know of our deep mistrust of the irresponsible polls witnessed throughout this campaign ..... for what it's worth, they did swing towards "Remain" in the final stages but were still giving mixed messages (if you looked hard enough). The bookies however are in no doubt ...... latest average odds as we write : Leave 13/2 against , Remain 8/1 ON. So they're in no doubt .... the odds heavily favour a "Remain" result. But remember, that's not necessarily the same as expecting the "Remain" camp to win heavily .... by a wide margin, in other words. But that's what will probably be needed if this issue is going to be put to bed. And even then, the chances of some nasty political fall-out remain high.