Bearish Bets on Mexico Peso Surge as Brexit Concern Spurs Hedges

Updated on
  • Net shorts in longest winning streak in more than a year
  • Peso trades near record low; economists bet on rate increase

Traders stepped up shorts on Mexico’s peso before Britain’s decision to leave the European Union, using the most-traded emerging-market currency to hedge against losses on riskier assets.

So-called net shorts -- the difference between the number of bearish bets on the peso by hedge funds and other large speculators versus bullish ones -- rose for a seventh straight week in the five days through June 24, according to the most recent Commodity Futures and Trading Commission data. The peso fell 1.3 percent to a record low of 19.1810 per dollar on Monday, after slumping as much as 1.7 percent following the U.K.’s downgrade by S&P Global Ratings. The currency tumbled 3.7 percent Friday after the U.K. referendum results were released.

“Shorts will continue to rise because there is a strong aversion to risk after Brexit,” said Roberto Galvan, a currency trader at Intercam Casa de Bolsa in Mexico City.

The correlation between the peso and the British pound has surged to a 10-month high, allowing traders to bet on peso declines as a hedge against potential losses from the decision. The U.K.’s decision on Friday raised concern that an already-fragile global economic recovery will falter. Mexico’s government announced federal spending cuts for the second time this year to reduce international funding needs, while swap traders boosted bets on higher borrowing costs before this week’s Banxico policy meeting.

The rise in net shorts marks the longest streak of increases in more than a year.

A decision on whether to increase the country’s key interest rate will be made on Thursday after analyzing the impact on inflation, central bank officials said in a joint press conference Friday with the Finance Ministry. Mexico’s central bank will increase interest rates by 25 percentage points to 4 percent, according to median estimate of analysts surveyed by Bloomberg.

“The weak peso poses some inflation risks but there really has not been any pass-through yet,” said Win Thin, the head of emerging-market strategy at Brown Brothers Harriman in New York. “And with growth concerns still in play for the U.S. and now the U.K. and the eurozone, can any EM central bank really justify tightening? If anything, I think the negative risks from Brexit argue for more dovish EM central banks, not more hawkish.”