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How to Hedge Against 'Fiscal Cliff': Mexican Peso?

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The panic about the looming "fiscal cliff" in the U.S. has led investors to look for hedges against the government failing to avert a fall over the combination of tax rises and spending cuts scheduled for 2013.

One hedge could involve betting on the Mexican peso, according to currency strategists at Citi.

The currency has been hit by worries about the fiscal cliff in recent week. Mexico is the closest Latin American country geographically and economically to the U.S., and is the prime candidate to short if the U.S. goes into economic crisis prompted by the fiscal cliff. The currency fell by around 7.7 percent against the dollar during the near-crisis of the debt ceiling last summer.

"Mexico is the most US-centric country of Latin America and would be dragged most by a contraction in U.S. GDP," according to Citi.

"Added to the liquidity of the currency and the central bank's lack of activism, we think structures with a short exposure to MXN would benefit most from a bumpy fiscal cliff scenario.

They recommend currency hedges with slightly longer term maturities, such as February 2013, because of the chance that the fiscal cliff"deadline" of January 1 will not see the immediate drop-off feared by some, and structures where further upside in the dollar/peso can be sold.

"The fall-out from falling into the fiscal cliff may be not as terrible as widely portrayed, as long as the market keeps the hope that a fix can be found in a reasonable time frame," according to Citi.

There is increased optimism about Mexico's economy on the international stage after the general election earlier this year.

"It's a lot easier to do business in Mexico than Brazil (and other Latin American countries). During the financial crisis, Mexico suffered dramatically, but there has been a huge rebound in the economy and now they'redoing well and becoming more open for investment," Irenea Renuncio, senior Latin American analyst at Maplecroft, told CNBC.

She said that Mexico was worth looking at in 2013 for investors, and added that the well-publicized drug related-violencein the country mainly in is mainly in the north, while the center is best for business.

"It's a positive story and you have access to the U.S.market," she said.

Contact Fiscal Cliff