Traders are betting that Mexico’s central bank is content to see a softer peso after its earlier strength threatened exports and tourism, Bloomberg reported on Friday. The peso is down nearly 9 percent from its early September peak and traded around 18.60 per dollar after Banxico’s surprise quarter-point cut last week, and asset managers hold their biggest net short position on the currency in two decades, according to Commodity Futures Trading Commission data through November 4. JPMorgan and Citigroup have both dropped long-standing overweight recommendations on the peso.
The mechanics are the rate differential. Banxico cut its overnight rate by 25 basis points to 6.25 percent on November 5, in a 3 to 2 vote, while the Federal Reserve is tightening, with a December increase priced as certain. That has compressed Mexico’s premium over the Fed’s 3.75 to 4.00 percent target range to 225 basis points, a record low on Banamex’s measure, and cutting while the Fed hikes undercuts the carry trade that drew capital into peso assets. Bank of America expects the peso around 19 per dollar next year.
Banxico has not endorsed the weaker-currency reading. Governor Victoria RodrÃguez has said policymakers do not target a specific exchange rate, and the bank’s guidance after the cut pointed to holding the attained level for a prolonged period rather than a sequence of further cuts. Deputy Governor Jonathan Heath, who dissented against the cut, has argued publicly that easing sent the wrong signal as inflation picked up, with annual inflation rising to 3.75 percent in October from 3.45 percent in September on INEGI data.
The next test is the minutes of the November meeting, due Thursday. If the majority’s reasoning leans on economic slack and a weak pass-through from the exchange rate to prices, the short position has official logic behind it. If the minutes stress the limits of that argument, the record short becomes crowded. Either way, the peso is now priced off a policy divergence that did not exist a month ago: the Fed’s path up and Banxico’s decision to step aside from it.