Investors Make Record Bets on Peso Rebound With Structured Notes

Banks last month sold the most U.S. structured notes tied to bets that the Mexican peso will appreciate against the dollar in at least two years.

Investors bought $85 million of securities tied to the currency pair in five offerings in May, the largest amount since at least the beginning of 2010, according to data compiled by Bloomberg. On May 24, HSBC Holdings Plc (HSBA), through its HSBC USA Inc. unit, issued $55.2 million of one-year notes that yield at least 9.45 percent if the Mexican peso doesn’t decline by more than 15 percent against the U.S. dollar, the largest such offering in at least two years, Bloomberg data show.

The peso “has been heavily sold and that leaves it ripe for a bounce higher,” Joe Manimbo, a Washington-based market analyst for Western Union Business Solutions, said in a telephone interview. “U.S. interest rates appear to be staying put for the foreseeable future, so that’s a broader source of dollar weakness.”

The Mexican currency may rise if there is a third round of quantitative easing, or QE3, in which the Federal Reserve buys government debt to drive interest rates lower, Manimbo said. Economists at Morgan Stanley, Bank of America Corp. and JPMorgan Chase & Co. see greater odds of that occurring, with Morgan Stanley estimating the chances at 80 percent, up from 50 percent last month.

The peso has gained about 2.2 percent since June 1 after touching its lowest level since March 2009 on that day. It sank 9.5 percent against the dollar in May, the most among widely traded currencies, as concern that Greece will abandon the euro prompted investors globally to avoid higher-yielding assets. The currency also weakened on speculation growth is slowing in the U.S., the destination for about 80 percent of Mexico’s exports.

Selling Reserves

Mexico’s central bank intervened in the foreign-exchange market for the second time in two weeks May 31, selling $107 million of reserves to slow the currency’s drop. Before the two interventions in May, Banco de Mexico last sold dollars on Dec. 17, 2009, to shore up the peso through a similar program it put in place following the collapse of Lehman Brothers Holdings Inc.

Goldman Sachs Group Inc. (GS) sold $10.3 million of structured notes tied to the peso on May 17. The securities return 8.75 percent if the peso doesn’t fall by 15 percent against the dollar, according to a prospectus filed with the Securities and Exchange Commission.

Banks sold $51.3 million of notes tied to the currency pair in November, the second-largest total since the beginning of January 2010, Bloomberg data show.

Structured notes are securities created by banks, which package debt with derivatives to offer customized bets to investors while earning fees and raising money. Derivatives are contracts whose value is derived from stocks, bonds, currencies and commodities.

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