Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Breaking News

Gold Dips Beneath $1,800 in Pre-Fed Shadow Boxing

Foreign bond buyers lift Mexico peso despite trade threats, downgrades

EconomyJul 05, 2019 02:16PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

By Abraham Gonzalez

MEXICO CITY (Reuters) - Mexico's peso, which swung wildly in early June after a Fitch downgrade and brief U.S. threat to impose tariffs, has steadied as the country's high interest rates attracted foreign buyers of bonds using borrowed money, analysts and economists said.

Under the "carry trade" strategy, investors borrow money in the currency of a country with low interest rates, such as the United States and some European countries, to buy bonds of a high-yield country like Mexico.

Mexico's Central Bank has kept its benchmark interest rate steady at 8.25% since hiking it in December to the highest level among all emerging countries except Turkey and Argentina.

The U.S. Federal Reserve's rate is 2.25%-2.50%.

"To the extent that the spread of rates was increasing, the carry trade began to become more important," said Gabriela Siller, an economist at Mexican bank Banco Base.

Since December 2015 the spread has doubled as the central bank raised rates to contain inflationary pressures, and foreign holdings of Mexican debt have grown by 87.2 billion pesos ($4.58 billion).

Mexico's President Andres Manuel Lopez Obrador regularly boasts of a strong economy, citing the peso as proof, despite a first-quarter contraction and signs of faltering investor confidence.

U.S. President Donald Trump vowed on May 30 to impose a tariff on all Mexican imports to stem a surge of illegal immigrants across the southern border, but suspended the threat after a bilateral deal was reached.

Fitch Ratings Inc downgraded Mexico's sovereign debt on June 5, citing trade tensions and risks from heavily indebted oil company Petroleos Mexicanos [PEMX.UL], or Pemex, while Moody's lowered its outlook to negative.

Graphic: Mexican peso, click https://tmsnrt.rs/2FRxIDt

The peso has strengthened 3.1% this year, to 19.0244 to the dollar on Friday, after slumping in the final 2018 quarter on Lopez Obrador's decision to cancel a partly built $13 billion airport for Mexico City.

"It's not more optimism; it's the high yield that has attracted more capital and has sustained the exchange rate," said Siller.

Some analysts predict that as long as the U.S.-Mexico spread remains high, the carry trade will sustain the peso.

Joel Martinez, an economist at brokerage firm SIF ICAP (LON:NXGN), said Mexico is attractive also to investors in countries with low current account deficits and reasonable debt-to-GDP ratios.

Dollar inflows to Mexico from U.S. trade have also supported the exchange rate, with a growing surplus, he added.

Mexico logged a trade surplus of $101.7 million between January and May this year in seasonally adjusted terms, according to official data, compared with a deficit of $4.30 billion in the same period 2018.

"The balance of payments is healthy," said Martinez.

($1 = 19.0408 Mexican pesos)

Foreign bond buyers lift Mexico peso despite trade threats, downgrades
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email