The Mexican central bank’s plan to support the peso is insufficient, and policy makers need to show more courage if they want to stem a drop in the currency, RBC Capital Markets said.
While the peso has posted the biggest gain in emerging markets since July 29, the day before Mexico’s central bank said it would spend at least $8.6 billion to buy the local currency, the plan won’t be successful in the long term, according to Daniel Tenengauzer, the head of global foreign-exchange strategy at RBC.
Investors should bet the peso will weaken to 17 per dollar, Tenengauzer wrote in a note Tuesday. The currency traded at 16.1609 per dollar as of 12:12 p.m. in New York.
“This new policy tool will not be sufficient to hold the currency steady because inflation expectations will begin to rise,” Tenengauzer wrote. The South African Reserve Bank, he wrote, “took a more courageous approach” to supporting the rand by increasing its key lending rate by 0.25 percentage point, while Mexico has held its benchmark rate at a record low.
Investors can profit from the differing stances by wagering the rand will outperform the peso, he said.
Mexican inflation will accelerate to at least 3.2 percent by the end of the year because of the effects of a weaker currency, Tenengauzer said, higher than the 3 percent estimate by the central bank.