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Peso Investors Love Mexico’s High Interest Rates

Anneken Tappe - MarketWatch
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September 29, 2017

High interest rates in Mexico compared with it’s Northern neighbors and Western Europe make the peso an attractive carry play for dollar and euro-investors, according to an analyst.

The Mexican peso has long been a popular go-to for investors interested in gaining exposure to emerging markets. ”It’s super liquid,” said Christian Lawrence, senior FX strategist at Rabobank.

The peso’s ample liquidity along with Mexico’s relatively high interest rates compared with developed market currencies, where official interest rates and government bond yields remain near historic lows after major central banks embarked on several rounds of quantitative easing.

“From a carry trade perspective, the peso is one of the most attractive currencies out there,” he said.

In a classic carry trade, investors borrow money in a country where rates are low and exchange it for the currency of a country where rates are higher, and then invest in bonds in that country. Currency traders can also simply buy a high-yielding currency while selling a low-yielding currency, accruing the difference between the overnight rates for the pair.

Mexico’s central bank, also known as Banxico, kept its key overnight interest rate at 7% in a Thursday policy decision. For reference, the country’s consumer price inflation, stood at 6.7% on an annualized basis in August—the highest level since 2001.

But the peso comes with its own set of risks. The country is currently renegotiating the terms of the North American Free Trade Agreement with the U.S. and Canada, and market participants expect Mexico to get the shorter end of the stick once the negotiations are concluded.

Read the rest at MarketWatch

Related: Mexico Opens Way for NAFTA Talks to Run Into 2018 (Reuters)

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