Heady mix may fuel too much demand for Mexico's peso
July 5 (Reuters) -An extremely strong will to invest and gamble when major currency markets are quietening will fuel demand for Mexico's peso as a key component for carry trades, which are likely to flourish.
Mexico's currency is supported by the highest interest rate for any of the more popularly traded currencies, offering better returns than the dollar. Crucially it is one of very few free-floating currencies that do so, and this dearth of choice could result in big gains for Mexico's currency.
The peso isn't very liquid so any rise in demand could stretch supply, leading not only to a big rise but also a rapid rise.
The post-election slump for the peso flushed out much of the cash that was previously invested in the peso and there is a good chance that traders will have to pay more for the pesos that they are likely to buy back.
Since the election, global stocks have soared to new 2024 highs while volatility has declined further, with that for the main FX pair - EUR/USD - dropping to multi-year lows.
This is happening ahead of the long-anticipated start of the U.S. easing cycle, which will fuel stock rallies and may widen the interest rate gap favouring the peso.
The peso, which has recouped half of its post-election losses may soon regain all the ground lost after the election. Should demand outstrip supply, it could far exceed the multi-year peak at 16.2620 which traded shortly before the election and reach the next big target at 15.37.
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USDMXN targets https://tmsnrt.rs/4eZ8jGW
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(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)
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