The Mexican peso is the world’s best-performing major currency this year

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Investors are pushing the world’s most expensive currency to ever more dizzying heights, shrugging off the risks from interest-rate cuts, divisive elections, and analyst warnings.

Mexico’s peso is the world’s best-performing major currency this year and the highest ranked on a list of real effective exchange rates — a measure of a nation’s competitiveness — compiled by Bloomberg. According to Deutsche Bank, that rate is now at its highest in Mexico since at least 2005.

The rally has proved so relentless — blasting past milestone after milestone — that investors are now afraid to bet against the currency, despite its high valuation. In fact, options market data show traders see a strengthening of the currency over the next three months as more likely than a decline.

“In the past we’ve tried to go against that strength and it just hasn’t worked,” said Nicolas Jaquier, a portfolio manager for NinetyOne UK Limited in London, who’s betting in favor of the currency. “It does look expensive on a number of models, but I think we have to take that with a big pinch of salt.”

The key to the peso’s strength has been its low volatility and Mexico’s record-high interest rates, which make it attractive to borrow in one currency and lend in pesos, the so-called carry trade.

Ever Higher

Fresh off its biggest annual gain in over two decades last year, the peso has climbed 1.8% against the dollar this year. It now trades at about 16.69 per dollar, near the strongest since 2015.

The gains come despite presidential elections in Mexico in June and in the US in November, which at least in the latter case pose the risk of abrupt policy changes. Some strategists are already urging caution. Deutsche Bank analysts warned last week that valuations are “reaching extremes” and Bank of America dubbed the peso “overvalued.”

Source: El Financiero

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