Rising funding costs and geopolitical risks have triggered a surge in implied volatility, prompting arbitrage traders to flee emerging markets. Currencies in the Asia-Pacific region have plummeted collectively, and even the "star currency" Mexican peso, which has been leading in recent years, has not been spared from misfortune.
On Tuesday, as high-yielding currencies fell before the US dollar, the Mexican peso's exchange rate against the US dollar plummeted by 1.7%, making it one of the worst-performing high-yielding currencies, having accumulated a 2.3% decline over the past five trading days. High-yielding currencies include the Brazilian real, Colombian peso, Polish zloty, and Hungarian forint, among others.
The strong return of the US dollar has dimmed the luster of the "super peso."
Since 2016, the Mexican peso has been one of the best-performing currencies globally, earning it the霸气 title of "super peso." High interest rates, low volatility, and political stability have made the Mexican peso a favorite among cautious investors, especially those who are hesitant to invest in currencies with poor liquidity.
However, recently, US inflation and retail data have exceeded expectations significantly, leading to the strong return of the US dollar and causing market volatility to soar abruptly. Traders have had to re-evaluate their positions, and many have begun to abandon this former "safe haven." The super charm of the "super peso" seems to be gradually losing its luster.
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Miguel Iturribarria, a strategist at BBVA's Mexico branch, stated:
Due to increased volatility, coupled with the expected narrowing of interest rate differentials, a risk-averse environment has emerged.
The surge in implied volatility is becoming the last straw that breaks the camel's back for the Mexican peso. Traders are reassessing the risks of arbitrage trades, having borrowed low-yielding currencies and bought high-yielding currencies, and now the profits from this strategy are being rapidly abandoned.
On Tuesday, the one-month implied volatility of the Mexican peso soared to 13.4%, nearly double the 7.4% at the end of March, causing violent fluctuations in the currency, and the Colombian peso has become the new darling of Latin American arbitrage trades.
In addition, investors who were previously bullish on the peso are accelerating its decline.According to recent futures data, bullish peso positions have been continuously increasing, with leveraged fund holdings reaching 57,711 contracts as of the week ending April 9, marking a new high since March 2023. As the US dollar once again demonstrates its dominance, these investors eager to take profits are becoming more bearish on the peso's prospects.
Will the peso continue to face pressure in the short term?
Analysis suggests that long-term favorable factors will still prevail, after all, the close economic ties between Mexico and the United States, as well as the nearshoring effect, will provide strong support for the peso.
Rabobank strategist Christian Lawrence, based in New York, said:
We expect volatility to recede, and the US dollar against the peso will also probe lower to previous lows in the coming weeks.
However, before that, the fate of the peso may still have to go through a baptism of wind and rain.
BBVA expects the Mexican peso to reach 17.40 pesos per US dollar in the next two months, further falling to 18.20 pesos by the end of the year, currently at 17 pesos.
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