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Peso Plummets: Carry Trade Party Over
1 Oct
Summary
- The Mexican peso has underperformed all major currencies recently.
- Interest rate differentials between Mexico and the US have narrowed significantly.
- Major financial institutions are cutting their year-end peso forecasts.
The Mexican peso has experienced a significant downturn, prompting analysts to revise their year-end forecasts lower. This currency, previously known as the "super peso," has underperformed every other major currency over the past month. Its decline stems from a narrowing interest-rate differential between Mexico and the United States.
This gap has diminished as the US Federal Reserve implemented rate hikes while Mexico’s central bank maintained its policy rate. This development directly impacts carry traders, who borrow in low-interest currencies to invest in higher-yielding ones.
Institutions including Societe Generale, Morgan Stanley, and Banco Base have all adjusted their peso predictions downward. Deutsche Bank strategists noted the peso's "carry story is losing appeal." The peso's weakness also coincides with a broader selloff in risk assets and rising US yields.
As long as US yields remain elevated and the Federal Reserve maintains a hawkish stance, analysts suggest the peso will struggle to recover its recent losses.
