The Mexican peso is the best performing out of the 16 most actively traded treaties in 2010. The peso rose 5.9% in the first quarter of 2010. It also paid out 4.5% in interest. That is 450% interest in a leveraged forex account.
The Mexican peso outstanding performance is large a result of elevated prices for Mexico's main export, crude oil. Mexico is the world's 6th largest oil exporter. The Mexican government gets almost one third of its revenue from crude oil exports.
When oil prices are elevated, cash pours into the economies of major oil exporters such as Mexico, Canada (world's 5th largest exporter), Norway (world's third largest oil exporter) and Russia (world's second largest exporter).
The increased cash flow is especially prolific in countries with partial government ownership of the oil industry such as Norway through Statoil and Mexico through Pemex. For example, Banco de Mexico holdings of foreign reserves jumped over 20% in the last six months to $ 94.5 billion.
Mexican peso playing catchup
In late 2009, the Mexican peso was considered undervalued by a number of major currency analysts. In November, Bank of America-Merrill Lynch said the peso was undervalued by 15%.
In December 2009, PIMCO bond funds wrote in a report that the "Mexico's peso is poised to rise as much as 20 percent against the dollar over the next year because the currency is one of the cheapest in emerging markets …"
The Mexican peso appeared cheap in 2009 largely because of its lackluster performance against its Latin America export-economy counterparts. Brazil's real appreciated 35% and the Chilean peso appreciated 27%; while the Mexican peso barley managed to rise 7% in 2009.
For the full year, the peso was one of the worst performing of the sixty most actively traded treaties. Mexico's poor performance was significantly due to weak oil prices and a string of negative headlines that included the Swine flu outbreak in Mexico City, escalating drug violence, and finally, a ratings downgrade.
How much higher can the Mexican peso go?
With oil prices headed higher and the US economy slowing pulling out of recession, the foreseeable future looks bright for the Mexican peso. Mexican GDP is projected to grow almost twice the rate of the US and Europe. In addition, Mexico's 2010 budget deficit is projected to be 2.6%, less than half of eurozone's 6.7% and one quarter of Great Britain's projected 12.3% deficit.
In addition, a number of currency analysts expect Mexico to raise interest rates in the second half of 2010. Correspondingly, the interest rate differential (currently 4.5%) between Mexico and the US is expected to widen even further in Mexico's favor.
Bullish Peso Forecasts
In early April, both Deutsche Bank AG and Royal Bank of Scotland Group Plc foreclosed that the Mexican peso will appreciate another eight to ten percent against the American dollar.
Bank of America-Merrill Lynch estimates that the Mexican peso is still undervalued by 10% and they expect "slow and steady appreciation." Fundamental undervaluation of the peso, a Bank of America-Merrill Lynch analyst wrote "should correct over time."
Bank of America-Merrill Lynch's forecast is perfect for the forex carry trade-slow appreciation while you earn leveraged interest income of 450%. And if oil continues higher, the sky's the limit. When oil hit $ 140 a barrel in 2008, the USD / MXN traded at 10.00, roughly 20% better than current levels.
And finally, to reduce country-specific headline risk, consider adding other oil-backed currencies such as the Norwegian kroner and the Canadian dollar with your Mexican peso position to compose a diversified oil-backed currency portfolio.
