Mexico Wooing Energy Cash Puts Peso on No Lose Path: CurrenciesJoseph Ciolli and Ben Bain
Foreign-exchange strategists are rallying behind planned energy reforms in Mexico designed to attract international investment, forecasting gains in the peso versus every major currency.
Mexico’s peso will climb next year against all 31 of the most-traded currencies tracked by Bloomberg, including a 5.5 percent increase versus the dollar and an 11.1 percent advance against the euro, according to median estimates in analyst surveys. Options betting on one-month implied volatility signal investors are the most confident in the peso since May.
President Enrique Pena Nieto presented a bill to Congress on Aug. 12 to end a seven-decade state energy monopoly in what the government is calling the biggest economic overhaul since the 1994 North American Free Trade Agreement. Chevron Corp. and Royal Dutch Shell Plc are among producers that expressed interest in Mexican oil fields.
“Energy reform is good from a foreign direct-investment perspective, which is also a very positive thing for the peso,” Michael Ganske, the London-based head of emerging markets at Rogge Global Partners Plc, said in an Oct. 29 phone interview. The firm oversees $8.5 billion of developing-nation currency and fixed-income assets.
The energy plan is the centerpiece of constitutional changes proposed by Pena Nieto that he said could boost growth in Latin America’s biggest economy after Brazil to 6 percent a year. Lawmakers approved a preliminary version of a bill last month that amends Mexico’s charter to bolster tax collection and passed laws this year to overhaul the nation’s education system and increase competition in the telecommunications industry.
The central bank signaled last week it will stop cutting interest rates, which may also boost the appeal of the peso to international investors and help to curb above-target inflation.
“The central bank’s explicit forward guidance means they’re getting more constructive on growth, which should be positive for the currency,” said Ganske. He added that Rogge Global is “long” the peso, betting it will strengthen.
Any gains would extend the peso’s rebound from a 13-month low of 13.466 per dollar on Sept. 3 to 13.0794 at 12:08 p.m. in New York.
The Mexican peso will be one of just six major currencies to gain versus the greenback by the end of the first quarter, Bloomberg analyst surveys suggest. Mexico’s currency will rise 12 percent against Argentina’s peso and 4.3 percent versus the Brazilian real.
The options market is also showing confidence in Mexico’s peso. One-month implied volatility fell to 9.68 percent yesterday, its lowest level since May 22 and down from a one-year high of 17.83 percent on June 20, data compiled by Bloomberg show. Smaller price swings make a currency less risky for an investor to hold.
By allowing private companies to pump Mexican crude for the first time since 1938, Pena Nieto, 47, intends to loosen state-owned Petroleos Mexicanos’s grip on production and attract the investment needed to reverse an eight-year drop in oil output.
Under the bill, foreign companies would receive a portion of profit while assuming risks to tap reserves that they can’t currently access. A Chevron spokesman said before the bill was released in August that the company welcomed Mexico’s “new opportunities for investments.” Shell Upstream Americas Director Marvin Odum said June 7 that Mexico had “enormous” potential and a “strong and growing” relationship with Pemex.
“The idea that foreign direct inflows are going to increase quite a bit” will buoy the peso, Alvise Marino, an emerging-markets currency strategist at Credit Suisse Group AG in New York, said in an Oct. 29 phone interview. “The outlook for Mexico politically just looks a lot more appealing than it does in many other countries.”
Credit Suisse sees the peso slipping to 13.06 per dollar by year-end, before climbing to 12.63 by the end of the third quarter of 2014, data compiled by Bloomberg show.
Any advance may take time to gather pace amid faltering growth in Mexico and the U.S., said Jeavon Lolay, a director of global research at Lloyds Banking Group Plc in London.
Mexico cut its 2013 growth forecast to 1.7 percent in September, from 3.5 percent at the start of the year, after industrial production contracted 0.6 percent in the second quarter and retail sales shrank in August for the second time in three months.
“It’s lost a bit of its gloss as of late,” Lolay said in an Oct. 29 phone interview. “Although we’re positive on it, we’re positive on it when the U.S. is doing well,” rather than “on its own merits.” Lloyds estimates the peso will end this year at 13 per dollar, before rising to 12.2 by end-2014. Mexico sends almost 80 percent of its exports to the U.S.
Slower growth in Mexico will help rein in consumer-price increases, the central bank said Oct. 25. Annual inflation has slowed in each of the past five months to 3.39 percent in September, compared with a target of 3 percent.
The peso gained 0.7 percent on Oct. 25 as Banco de Mexico lowered its benchmark overnight lending rate to a record 3.5 percent from 3.75 percent, while saying in a statement further cuts “aren’t recommended” in the foreseeable future.
“This underlines their credibility as one of the most conservative central banks in the world,” Eric Fine, a New York-based money manager at Van Eck Global, which oversees $5 billion in emerging-market assets, said in an Oct. 29 phone interview. The energy reforms are “the kinds of things that can take a country to the next level and generate upward pressure on the currency.”
Options traders are becoming more bullish on the peso, narrowing the premium on contracts to sell the Mexican currency compared with those allowing for purchases. The three-month 25-delta risk-reversal rate was at 2.79 percent yesterday, down from a one-year high of 4.51 percent in June, data compiled by Bloomberg show.
“The short-term impact of the rate-cut decision has me fairly constructive on the peso heading into year-end,” Eduardo Suarez, a Latin America foreign-exchange strategist in Toronto at Bank of Nova Scotia, said in an Oct. 28 phone interview. “It’s quite foreseeable that foreign direct investment will be boosted a lot, which will support the peso.”