Mexican Peso Strength Prompts Bank of America to End Short Recommendation

Bank of America ends short bet on Mexico's peso due to its unexpected strength and political shifts in Brazil.

By Bill Bullington

4/12, 16:24 EDT

Key Takeaway

  • Bank of America ends its recommendation to short the Mexican peso against the Brazilian real due to the peso's unexpected strength and Brazil's political volatility.
  • The Mexican peso's bullish momentum raises concerns about overvaluation, with non-commercial traders holding $5.2 billion in positive bets.
  • Despite Mexico's central bank rate cut signaling an easing cycle, strong fundamentals are expected to support the peso, with a stable outlook but potential for slight depreciation by end of 2024.

Peso Performance and Strategy Shift

Bank of America Corp. recently closed its recommendation for investors to bet on declines in the Mexican peso against the Brazilian real, a move prompted by the unexpected resilience of the Mexican currency and political volatility in Brazil. Initially, the bank had concerns about the Mexican peso's performance due to factors such as a weaker US labor market and US election risks, which have yet to materialize. Since November 17, when the recommendation was made, the Mexican peso has appreciated over 3% against the US dollar, showcasing its strength in the face of anticipated challenges. This performance has positioned the peso as a standout among developing-nation currencies, second only to the Colombian peso in terms of gains. The Brazilian real, on the other hand, has seen a decline of about 5% in the same period, influenced by investor concerns over President Luiz Inacio Lula da Silva's administration's interventions in major Brazilian corporations.

Bullish Sentiment and Overvaluation Concerns

The Mexican peso's bullish momentum has been underscored by a significant increase in positive bets by non-commercial traders, reaching levels not seen since early 2020. This group, which includes asset managers and hedge funds, has shown unprecedented bullishness on the peso, with contracts worth $5.2 billion indicating a strong conviction in the currency's prospects. However, this optimism has led to concerns about the peso's overvaluation and the sustainability of its rally. Bartosz Sawicki, a market analyst at Cinkciarz.pl, noted that while the peso has performed exceptionally well, its current valuation and positioning might be increasingly stretched. Sawicki predicts a sideways movement for the peso, questioning whether the interest rate differentials between the US and Mexico will remain wide enough to maintain the currency's appeal.

Economic Factors and Rate Cuts

Mexico's central bank's decision to cut interest rates for the first time since 2021 has introduced a new dynamic into the peso's trajectory. The cut, which brought the rate down to 11%, signals the beginning of an easing cycle that could potentially dampen the peso's attractiveness as a carry trade currency. Despite this, the peso's strong fundamentals, including record remittances from the US and robust economic growth, are expected to support its value. Sawicki forecasts a slight depreciation against the dollar by the end of 2024 but maintains a relatively stable outlook for the currency in the near term. The anticipation of rate cuts by the Federal Reserve and the impact of upcoming elections in both Mexico and the US are also expected to influence the peso's performance, adding layers of volatility and uncertainty.

Street Views

  • Bank of America Strategists (Neutral on Mexican peso and Brazilian real):

    "We got stopped in long BRL/MXN and have lost conviction as Brazil’s politics are more volatile than expected... our concerns about MXN (weaker US labor market, US election risks) keep getting postponed."