From Mexico Peso to Pound, Top Forecasters Pick Fed Rate Winners

  • Chinese yuan also seen gaining after Fed raises interest rates
  • Odds of U.S. central bank moving seen at 32% in futures market

The dollar isn’t the only currency likely to benefit once the Federal Reserve starts raising interest rates, according to the most accurate foreign-exchange forecasters.

Mexico’s peso is next in line to receive a boost, say Credit Suisse Group AG and Toronto-Dominion Bank, which topped Bloomberg’s rankings for currency predictions in the second quarter. After tumbling to a record versus the dollar last month, the peso may find its feet as the nation’s central bank signals it plans to take policy cues from its U.S. neighbor.

Currencies that “markets perceive to share similar features with the dollar” will strengthen, said Shahab Jalinoos, the New York-based global head of foreign-exchange strategy at top-ranked Credit Suisse. He singled out the U.K. pound, which has been buoyed by the potential for the Bank of England to follow the Fed with a rate increase, and China’s yuan as other potential gainers.

While the odds of the Fed raising rates from an all-time low at this week’s policy meeting have dwindled after a succession of below-forecast employment reports, futures traders are still pricing for U.S. officials to start tightening policy before 2015 is out. The prospect has supported the dollar for more than a year, and the race is on to sift out the other likely winners and losers.

A higher benchmark rate enhances the return investors get from holding a currency, while making it more expensive to borrow.

“There aren’t many countries in a position to hike rates,” Jalinoos said. “You have to start looking at emerging markets. The Mexican peso” is likely to gain “on the perception that the Mexico rate cycle is aligned with the U.S.,” he said.

While Jalinoos predicts the peso will weaken to 17.5 per dollar in three months’ time, from 16.6 as of 10:40 a.m. New York time on Wednesday, he says traders should buy it against volatile peers such as South Africa’s rand and Australia’s dollar. It sank to a record 17.3056 per dollar on Aug. 26 amid a drop in the price of oil, which accounts for a third of Mexico’s budget.

China’s yuan may gain versus the euro and yen once the Fed acts, Jalinoos said, as officials in the second-biggest economy seek to stabilize the exchange rate after last month’s devaluation roiled global markets.

Yield Advantage

Mexico’s currency may be boosted by a rate increase after officials -- keen to maintain their yield advantage over the U.S. -- changed the schedule of their policy meetings in July to follow those of the Fed.

Mexico’s central bank, known as Banxico, will raise its 3 percent main rate by a quarter-percentage point in the third quarter, according to the median estimate of 29 economists surveyed by Bloomberg last month.

“I expect the Mexican rate cycle to follow the U.S. closely,” said Per Hammarlund, chief emerging-market strategist in Stockholm at SEB AB, Scandinavia’s biggest foreign-exchange trader. “Banxico has been worried that the Mexican peso weakness would translate into higher inflation. I expect the Fed to hike rates this year and Banxico to follow.”

Hammarlund predicts the peso will end the year at 16.9 per dollar, with a Mexican rate increase slowing its decline.

Futures suggest a 30 percent chance the Fed will raise its main rate from near zero when its policy meeting closes Thursday, down from 38 percent at the end of August. The odds of a move by year-end are 62 percent.

The calculations are based on the assumption than the effective fed funds rate will average 0.375 percent after liftoff.

Second Mover

Traders have pushed back wagers on the U.K.’s first post-crisis rate increase, too, though they’re still expecting the BOE to be the first major developed-world central bank to move after the Fed. While it’s since fallen, sterling reached its highest level in almost eight years against the euro in July.

The pound may strengthen versus the currencies of commodity-producing nations, rather than the dollar, once the Fed lifts rates, according to Mazen Issa, senior foreign-exchange strategist at Toronto-Dominion.

Mexico’s peso may gain “because of the expectation that the central bank won’t be far behind in normalizing rates,” Issa said from New York. “A Fed hike will also put the Bank of England back into play.”

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