The Mexican peso looks ready to rise, these strategists say.
With all the tumult in Europe, many emerging-market currencies have been largely out of the spotlight - and under the rader, some positioning quirks have developed that spell investment opportunities, say Claudio Irigoyen and Ezekiel Aguirre, currency strategists at Bank of America Merrill Lynch.
"When markets began to fret about European sovereign solvency and risk aversion jumped, foreign investors who were invested in Mexican government bonds chose not to sell them, and hedged the foreign exchange exposure via futures instead," they wrote in a note to clients. In effect, these foreign investors - who held 41.1% of all Mexican government bonds, an all-time high, as of November 2 - were selling the peso to hedge their bond positions, creating downward pressure on the currency.
At the same time, non-commercial investors went from peso positions that were net long $4.2 billion in mid-July to positions that were net short $1 billion by November 11, according to data from the Commodity Futures Trading Commission.
There have been similar swings in these investors' positions in other Latin American currencies. But since late October, they have been reversing course in the Brazilian real and others, while their net short position in the Mexican peso has increased slightly. That means a recovery in Europe could spur more reversals in net short peso positions than others - and a worsening crisis there would mean holders of other currencies would have more to hedge.
Irigoyen and Aguirre were seeing value in the peso before the positioning data became clear, thanks to a lagging economic recovery and cheap valuation in fundamental terms. But now, they say, "We think this divergence in positioning between the real and the peso presents an additional motive to go long MXN against the BRL."
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