Bullish Peso Bets Jump 35% to $5 Billion as Exports Climb: Mexico Credit

Futures traders are boosting bullish bets on the Mexican peso to an almost three-year high on speculation rising exports will propel gains in the currency.

Wagers on the peso appreciating against the dollar outnumbered bets on a decline by 119,062 contracts, near the most since February 2008, according to the Commodity Futures Trading Commission. Even as yields on Mexican peso bonds climbed 24 basis points this year, investors earned dollar-based returns of 5.3 percent because of the currency’s gain, according to Bank of America Corp. Emerging-market local government debt returned 4.7 percent during the same period.

The peso has advanced 4.6 percent this year as increasing U.S. demand for automobiles and other exports fuels economic growth. Latin America’s second-biggest economy may expand as much as 5 percent this year after growing 5.5 percent in 2010, the fastest in a decade, Finance Minister Ernesto Cordero said. The rebound in the U.S. helped drive Mexican exports to a record $298 billion last year.

“The peso tends to perform well as the U.S. improves,” Rogerio Oliveira, an emerging-markets strategist at Morgan Stanley in New York, said in a telephone interview. “It seems cheap on a long-term valuation. We are still bullish on the peso.”

Futures traders have increased their bullish bets on the peso by 35 percent since March, the most in six months. The $5 billion of so-called net longs accounted for 75 percent of open contracts on the peso, the most among nine major currencies, including the euro and the yen, tracked by Washington-based CFTC. Wagers on the peso gaining outnumbered bets for a decline by a record 125,334 in February 2008.

Yield Gap

Foreign investors boosted holdings of Mexican government debt to 733.6 billion pesos ($62 billion), or 24 percent of the total outstanding, from 14 percent a year earlier, according to the central bank.

The average yield of Mexico’s bonds rose to 6.78 percent, from 6.54 percent at the end of 2010, according to Bank of America. Bonds due in 2024 yield 7.56 percent, or 365 basis points more than similar-maturity U.S. Treasuries, according to data compiled by Bloomberg.

The country’s exports rose 24 percent in the first two months of 2011 to $50 billion, the best start to a year, according to the statistics agency. Overseas shipments of vehicles, Mexico’s largest export, rose 17.8 percent in March to a record 192,783 units, the Automobile Industry Association said yesterday. The U.S. buys 80 percent of Mexican exports.

“The peso has benefited from the upward recovery of the U.S.,” Flavia Cattan-Naslausky, a currency strategist at RBS Securities Inc. in Stamford, Connecticut, said in a telephone interview. “You still get the peso relatively cheap to everyone else.”

Lag Behind

The peso reached 11.7108 per dollar last week, the strongest level since October 2008, before retreating to 11.7770 as of 10:07 a.m. New York time. The currency’s 11.9 percent gain over the past two years is less than one-third of the advances in the Brazilian real, the South African rand and the Colombian peso, according to data compiled by Bloomberg. The peso is 5.1 percent weaker than its average valuation of the past decade.

Investors are betting on more gains in the peso because Mexico is less concerned than regional counterparts about allowing its currency to rally, Morgan Stanley’s Oliveira said.

Cordero said on March 28 that the currency controls implemented by other developing nations are ineffective and create “distortions” in the economy.

‘Not Uncomfortable’

While Mexico’s central bank has been buying up to $600 million a month through options since March 2010 to boost its foreign reserves, Brazilian policy makers have made monthly purchases of $8.1 billion this year to curb gains in the real. Brazil also tripled a tax on foreign investors’ local bond purchases in October and changed rules on taxes paid on foreign loans three times since March 29.

“Mexico is one of the few emerging-market countries where the central bank is not uncomfortable with the currency appreciation,” Oliveira said. “We like the risk-reward of” betting on the peso’s gain, he said.

The extra yield investors demand to own Mexican government dollar bonds instead of U.S. Treasuries widened two basis points today to 135, according to JPMorgan Chase & Co.

The cost to protect Mexican debt against non-payment for five years fell 1 basis point yesterday to 99, according to CMA. Credit-default swaps pay the buyer face value in exchange for the underlying securities or cash equivalent if the issuer fails to comply with debt agreements.

‘Quite Heavy’

Yields on the interbank rate futures contract due in August held at 4.96 percent yesterday.

The increase in bullish peso wagers leaves the currency vulnerable to swings in investor demand for higher-yielding emerging-market assets, according to Roberto Melzi, a strategist at Barclays Plc in New York.

“The peso position is quite heavy,” Melzi said in a telephone interview. “We will see some adjustment.”

The peso will fall 0.6 percent to 11.875 per dollar by the end of the year, according to the median forecast of 22 analysts surveyed by Bloomberg. RBS predicts a gain of 2.6 percent to 11.5, while Morgan Stanley recommends clients bet the peso will rise to 11.7. BNP Paribas predicts the peso will strengthen to 11 by Dec. 31.

The currency sank to a record low of 15.5892 per dollar in March 2009 as a slump in the U.S. led to a 6.1 percent contraction in the Mexican economy that year, the worst recession since 1995.

U.S. Growth

Growth in the U.S. may accelerate to 3 percent this year from 2.9 percent in 2010, according to the median estimate in a Bloomberg survey. The 5.5 percent expansion in Mexico last year compared with average 6.1 percent growth in Latin America, according to the International Monetary Fund.

“Mexico lagged the recovery cycle in other Latin American countries,” Diego Donadio, a Latin America strategist in Sao Paulo at BNP, said in a telephone interview. “Now that the U.S. is getting more traction in the cyclical recovery, investors are more confident that the Mexican peso will perform as well. The currency will catch up.”

To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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