(Bloomberg) -- The Mexican peso’s three-month slide has made it a bargain for investors willing to stomach the market turbulence that likely lies ahead, according to JPMorgan Chase & Co.
The biggest US bank is sticking to a call to pile into the peso. That’s even as soaring volatility and a roughly 14% rout versus the dollar since the end of May pushed rivals including Barclays Plc, Citigroup Inc. and Goldman Sachs Group Inc. to close bullish recommendations over the last few weeks.
The selloff shows no signs of abating. The currency is down more than 3% this week, hovering around 19.8 per dollar. If it ends the New York session at these levels, it will be the lowest since late 2022.
It’s the latest leg of a drop that’s made the peso by far the worst-performing currency in the developing world since June elections ushered in worries about Mexican President Andres Manuel Lopez Obrador’s plans to overhaul the nation’s judiciary. The concerns that the new rules could erode checks and balances have outweighed any sense of relief for emerging markets from expectations for easier Federal Reserve policy.
But Saad Siddiqui, an emerging-markets fixed-income strategist at JPMorgan, insists the slump spells opportunity.
Some of the forces that made the peso the world’s strongest major currency for most of the past two years, such as rising remittances from the US and investment from companies looking to move production closer to the US, are intact, he argues.
“At 19, there’s no question mark about the valuation of the peso,” Siddiqui said in an interview.
The broad backdrop has led the bank to pitch an overweight recommendation since November 2022. Since the initiation of that call the peso has weakened 1.1%, although the bank has had a hedge in place since May.
In May, the bank recommended a two-pronged hedge for the overweight peso position. It suggested selling a three-month dollar-peso digital call, betting the pair will be below 18.50 at the end of that period. It combined that with going long a six-month digital call at the same strike price.
This week underscores the volatility facing peso investors, who have already been hit hard by the unwinding of global carry trade positions, and now have to contend with a new government at home and elections in the US, Mexico’s biggest trading partner.
On Monday, the Mexican president’s judicial overhaul got a nod from a key congressional committee, sparking fresh peso weakness. The fear around that is that it will erode limits on the ruling party’s power.
On Wednesday, the currency rebounded after the incoming leader of the ruling party in the lower house, Ricardo Monreal, said lawmakers won’t rush the proposal. It later trimmed the gains after President-elect Claudia Sheinbaum, who takes over in October, said two opposition senators had joined the ruling coalition, moving her government closer to the supermajority needed in both chambers to change the constitution. On Thursday, the peso resumed its slump.
Election Focus
Then there’s the approaching US presidential election, which is contributing to higher volatility across currency markets. The outcome of the vote is particularly important for Mexico, given speculation around increased tariffs should former President Donald Trump win in November.
“Politics do matter and there’s event risk, so investors are hesitant to dive back in,” Siddiqui said.
Still, JPMorgan’s view is that Mexico’s structural strengths — including solid trade and external balances, a central bank that works independently from politics and the nearshoring trend — will eventually reassert themselves as drivers of peso strength.
“At some point the Mexican peso is going to be a big trade,” Siddiqui said. “We just need market confidence for this to come back.”
--With assistance from Davison Santana.
©2024 Bloomberg L.P.
