Everyone’s Favorite Currency Short Is Back in Play After Respite

  • Rush to short peso shows status as proxy hedge hard to break
  • Central bank largely refrains from intervening as peso tumbles

Three months after Mexican officials unveiled an arsenal designed to dissuade speculators from dumping the peso, the currency’s status as a proxy hedge is alive and well.

Net short positions -- bets that the peso is headed for a fall -- surged during this month’s global risk-off rout to a level not seen since policy makers shocked investors in mid-February with an interest-rate hike and changes to dollar-auction triggers. The peso has long been the most-liquid currency in developing economies, making it a popular asset to sell short as a means of offsetting losses when emerging-market assets are tumbling.

As the peso this month reclaims its position as one of the world’s worst-performing currencies, traders are left wondering: Where is Banxico? Other than a $2 billion surprise dollar sale directly to banks Feb. 17, the central bank has avoided tapping reserves to contain recent losses despite pledges it’d be quick to step in if speculative trades hit the currency harder than its peers.

“They aren’t doing a good job of preventing or inhibiting these players from speculating with the currency,” said Alejandro Silva, a partner at Silva Capital Management in Chicago. The recent rush to bet against the peso “is a sign the market is unconcerned that Banxico will intervene.”

That’s bad news for central bank Governor Agustin Carstens, who sought to blunt peso swings by raising interest rates by a half-percentage point in an unscheduled meeting on Feb. 17. He also said policy makers would sell greenbacks directly to banks whenever needed to support the peso, a departure from years of public auctions based on pre-determined triggers. The moves aimed to “anchor the value of the currency,” Finance Minister Luis Videgaray said in an interview two days after the announcement.

And for a short time, it seemed to be working. In the weeks following the shake-up, the peso shed its worst-in-the-world mantle and a gauge of the market’s stability -- known as implied volatility -- reached its lowest since January. The currency rallied 9.9 percent while traders cut 84 percent of their short positions by the start of this month, data compiled by Bloomberg show.

That’s unraveling now amid an emerging-market selloff triggered by mounting speculation that policy makers in the U.S. will start raising rates again soon. On Thursday, the peso traded below the 18.37 level it closed at the day before Carstens’s announcement. It weakened 0.4 percent Thursday to 18.5321 per dollar as of 8:49 a.m. in New York.

The short-lived bounce illustrates the tenuous nature of gains on the back of intervention. Mexico joins Latin American countries from Colombia to Brazil this year that have tried -- and largely failed -- to influence their exchange rates. Mexico’s central bank declined to comment.

Using the peso as a hedging instrument is a habit that’s going to be hard to break, said Andres Jaime, a currency strategist at Barclays Plc in Chicago. The peso is cheap to borrow relative to peers and trades 24 hours a day, five days a week, making it an attractive hedge, he said.

“That it’s a proxy hedge, that’s not going to change," said Jaime, who was the most accurate peso forecaster in the first quarter, according to Bloomberg Rankings. “What can change is investors or speculators not using it excessively like they did in the first month and half of the year."

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