World's Best Carry Trade Is Buying Mexican Peso: Rabobank

Updated on
  • Currency is tops when adjusting for volatility and liquidity
  • Peso has been the No. 2 emerging-market carry bet this year
Silver coins are melted in order to be re-used again at the Mexican Mint, or Casa de Moneda, in San Luis Potosi, Mexico.

Photographer: Susana Gonzalez/Bloomberg

Investors seeking to profit from steep interest rates in emerging markets would do best to buy Mexican pesos, according to Christian Lawrence, a strategist at Rabobank.

Projections for the next three months show the currency generating an annualized return of about 8 percent for investors who buy the peso in a so-called carry trade, according to Lawrence, whose bank is among the most bearish forecasters for the currency. While that’s slightly lower than volatility-adjusted potential returns on Turkey’s lira or India’s rupee, Lawrence says the peso’s liquidity makes it a much more attractive bet.

“When volatility spikes, everyone tends to run for the exits at once,” Lawrence said in an interview from New York. “Having a liquid currency is certainly very beneficial when you need to get out.”

The peso already has been one of the best volatility-adjusted carry bets this year, placing second behind the Malaysian ringgit as investors benefited from both appreciation and Mexico’s 7.5 percent benchmark interest rate, which compares with 1.75 percent in the U.S.

Rabobank predicts the peso will depreciate to 20.5 pesos per dollar in the second quarter and end the year at 19.8, compared with consensus forecasts of 19 in the quarter and 18.6 at year-end. The peso rose for a third day today, gaining 0.02 percent to 18.09 as of 10:24 a.m. in New York.

(Updates with Rabobank background in second, last paragraphs.)
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