Banks sold the most structured notes betting on the peso to rise against the dollar last month since June on expectations that an improving U.S. economy will boost the Mexican currency.
Issuance climbed to $23.2 million of the U.S. securities in three offerings, according to data compiled by Bloomberg. This is the first month of sales since October, when investors bought $3.84 million of the notes.
Concern that the global recovery is waning has pushed the MSCI Emerging Markets Index to a five-month low and no emerging market currency has gained against the dollar in 2014, Bloomberg data show. While the peso fell to an 18-month low against the dollar on Feb. 3, the buying power of the currency will rise in the year’s second half as trade strengthens between Mexico and the U.S., said Juan Carlos Alderete, a foreign-exchange strategist at Grupo Financiero Banorte SAB.
“We think Mexican exports in the U.S. market can and will have an increasing market share,” he said in a telephone interview from Mexico City. “The Mexican peso has depreciated strongly, so in competitive terms, mostly relative to China, it’s in a much better position.”
Mexico’s credit rating was raised one level to A3 yesterday by Moody’s Investors Service Inc., which cited moves to open up the energy industry to foreign investment and broaden sources of tax revenue. The rating is four steps above the threshold that signals high-yield, high-risk debt.
The peso has fallen about 1.7 percent against the dollar this year as of 3:47 p.m.
Structured notes, which are debt securities packaged with derivatives, offer customized bets to individual investors. Banks earn fees and raise money from them. Derivatives are contracts with values derived from stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.
JPMorgan Chase & Co. (JPM) sold all the notes last month, which all gain when the peso increases against the dollar and offer some protection against losses, Bloomberg data show.
The bank issued $20 million of one-year securities on Jan. 27, the largest offering. They yield at least 6.9 percent unless the peso weakens and the exchange rate drops more than 10 percent, in which case all capital would be at risk, according to a prospectus filed with the U.S. Securities and Exchange Commission. The bank estimated their initial value at 98.2 cents on the dollar.
The deal was the largest since HSBC Holdings Plc (HSBA) sold $40 million of securities on Jan. 11, 2013, Bloomberg data show. Those notes paid a minimum of 6.4 percent as long as the peso didn’t depreciate more than 10 percent, according to a prospectus filed with the SEC.
The securities matured on Jan. 28, according to the prospectus. They would have yielded the minimum 6.4 percent, based on the terms and movements in the exchange rate. During that period, the peso fell 4.6 percent against the dollar.
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