Mexico’s peso rallied to a one-week high after Wells Fargo & Co. and Morgan Stanley said its underperformance was unjustified.
The currency gained 0.7 percent to 15.3373 per dollar as of 2:55 p.m. in New York. While that trimmed its losses over the past month to 2.7 percent, the peso is still the worst performer among 16 major currencies tracked by Bloomberg.
The peso has slumped amid sluggish growth in the U.S., the destination for 80 percent of Mexico’s exports, and as economists pushed back their estimates for interest-rate increases by the local central bank. While those issues are drags on the currency, the extension of its drop is perplexing given efforts by local officials to prop up the peso and improvement in Mexico’s economy, according to Wells Fargo.
“The global backdrop contains some favorable elements for the Mexican currency,” Nick Bennenbroek, the head of currency strategy at the San Francisco-based bank, wrote in a note.
Bullish U.S. futures bets on the Mexican peso outnumbered bearish ones last week for the first time since September, according to data from the Commodity Futures Trading Commission.
The peso’s poor performance “perplexes,” Bennenbroek said. While the peso usually gains when global equity indexes advance, that hasn’t happened this year, he wrote. The MSCI All Country World Index has climbed 5.6 percent in 2014.
The bank sees the currency weakening to 15.60 pesos per dollar in the next nine months, before recovering and rising to
15.30 pesos per dollar in the next 18 months.
While there’s “no clear reason” for the underperformance in Mexico’s peso, U.S. economic data needs to improve for the currency to outperform its emerging-market counterparts, Morgan Stanley analysts led by Felipe Hernandez wrote in a report. For the peso to gain against the dollar, Mexican economic data must improve, they wrote.
“We would need to see Mexican growth outperform lofty investor expectations, rather than these expectations consistently being revised lower, as well as a continuation in the recent strength in oil prices,” they said.