Photographer: Susana Gonzalez/Bloomberg

Mexican Peso Shorts at Record Ahead of U.S. Election Debate

  • Net short positions jumped 37% in a week, highest in 20 years
  • Peso is worst-performing currency in emerging markets

Wagers against the Mexican peso have surged to a record as economists at Bank of America Corp. and Citigroup Inc. warn that Monday night’s U.S. presidential debate may drive fresh losses.

Net short positions on the peso jumped 37 percent in the week ending Sept. 20 and are now the highest in more than 20 years of data, according to the most recent data from the Washington-based Commodity Futures Trading Commission. One-month implied volatility, a measure of the cost to protect against price swings, rose to 19 percent Monday, the highest in the world.

Traders have been piling up bearish positions as polls showed Democrat Hillary Clinton’s lead narrowing in recent weeks over Republican nominee Donald Trump, who has pledged to renegotiate the two-decade-old Nafta trade accord that turned Mexico into an export powerhouse. The currency is the worst performing in emerging markets over the past month, and Citigroup warned in a note to clients that it will fall further if voter surveys show Trump gaining more ground after tonight’s debate.

"If he does well today and polls continue to go in his favor, that would probably mean a more depreciated peso," said Carlos Capistran, the chief Mexico economist at Bank of America Corp. in Mexico City and the former director of macroeconomic analysis at Mexico’s central bank. "All of that is happening in the context of a Mexican economy that’s starting to look more vulnerable."

Mexico is struggling to convince investors it can avoid a credit-rating downgrade as its economy weakens. Mexico’s current-account deficit has swelled to the widest since 1999 as the government slashes growth forecasts amid falling crude exports and a sluggish expansion in the U.S., the Latin American country’s biggest trading partner.

The prospect of a Trump victory has compounded investors’ concerns about Mexico’s deteriorating finances, its debt-laden state-owned oil company and sluggish growth.

"Mexico is at the sharp end of ’Trump risk’ just when oil prices have collapsed and the Fed is raising rates," said Nicholas Spiro a partner at London-based Lauressa Advisory Ltd., which advises asset managers. "It’s a perfect storm to end all perfect storms."

The peso’s real effective exchange rate -- its trade-weighted value versus a basket of other major currencies, adjusted for inflation -- shows it’s undervalued compared with historical norms, according to data from BIS. The measure fell to a 20-year low in August as the peso was trading about 25 percent weaker than the 20-year average. It has fallen further since then.

Clinton and Trump were tied in a head-to-head Bloomberg Politics national poll, with each getting 46 percent of likely voters.

The peso weakened as much as 0.7 percent, touching a new record low of 19.9239 per dollar in Mexico City. The currency has lost 6.6 percent in the past month, the most in emerging markets.

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