Citigroup Unconvinced of Mexico Peso Bounce as Fed Meeting Looms

  • Analysts say emerging-market positives likely short-lived
  • Potential bond outflows worth watching, Citigroup says

The Mexican peso’s rally to a three-week high is probably only a temporary breather from a selloff that pushed the currency to a record low as the Federal Reserve prepares to raise interest rates, according to Citigroup Inc.

Even if U.S. policy makers leave borrowing costs unchanged this month, “the uncertainty would likely remain an overhang over emerging-market currencies,” Citigroup analysts led by Kenneth Lam said Tuesday in a research note to clients. “We are inclined to see any rally as a countertrend rally until the fundamental story changes.”

While some technical indicators suggest the peso could rally further, the
positive factors are likely to be fleeting, the analysts said. They said that potential bond fund outflows could drag on the currency and that while retail investors have already started pulling out money, such a move by institutional investors probably means the peso would suffer.

Global investors held on to Mexican government debt last month, pushing their holdings of fixed-rate peso bonds known as Mbonos to more than 60 percent of the $150 billion outstanding, a 15-year high, according to the central bank.

The peso climbed Wednesday for a second straight day, gaining 0.3 percent to 16.7681 per dollar at 11:17 a.m. in New York. It slumped a week earlier to an intraday record of 17.3056 per dollar as investors braced for the impact of an interest-rate increase in the U.S. and slowing Chinese growth.

Net Shorts

Bets against the peso are near a record high. The difference in the number of wagers by large speculators on a decline for the Mexican currency compared with those on a rise -- so-called net shorts-- was 76,937 last week, figures from the Washington-based Commodity Futures Trading Commission show. The all-time high of 88,843 was reached in July.

A sustained peso rally could trigger a covering of shorts, according to the Citigroup analysts.

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