Mexico’s Peso Becomes Worst in the World as Carry Traders Flee

Analysts are rushing to cut their year-end forecasts for the Mexican peso after it underperformed every other major currency over the past month.

Societe Generale, Morgan Stanley and Banco Base have all revised their estimates for the peso lower as carry traders — who borrow in a low-interest-rate currency to invest in a higher-yielding one — flee the market.

The peso has weakened almost 6% this month, underperforming all currencies tracked by Bloomberg after hitting a two-year high early in September. Once known as the “super peso,” the currency slid amid a rate hike from the US Federal Reserve and a subsequent central bank hold in Mexico, narrowing the interest-rate differential that has helped underpin the popular carry trade.

“The peso was a vulnerable currency leading into this selloff,” said Brendan McKenna, an emerging-markets strategist at Societe Generale in New York. “Once Banxico confirmed its willingness to decouple from the Fed and allow for a thinner rate gap, those vulnerabilities were realized and the peso reacted appropriately.”

The differential between US and Mexico interest rates narrowed to the lowest since at least 2008, halving in the last year alone, data compiled by Bloomberg show.

After Mexico policymakers kept rates unchanged on Sept. 24, Societe Generale adjusted its forecast for the peso at year-end to 18 per dollar — in line with current levels, but compared to a projection of 17.25 per dollar before the central bank decision.

This week Morgan Stanley revised its fourth quarter forecast for the peso to 18.25 pesos per dollar, 6% weaker than its earlier prediction. Banco Base on Monday changed its estimate for the same period to 18.20 per dollar, from 17.80 previously.

“The carry trade party is over,” according to Gabriela Siller, head of economic analysis at Banco Base.

Deutsche Bank strategist Carlos Munoz-Carcamo wrote in a report last week that the peso’s “carry story is losing appeal” with the currency screening as one of the most expensive among its peers and positioning “seeming stretched.” Strategists at the bank are now forecasting 18.20 pesos per dollar for year-end, compared to 17.5 previously.

Mexico’s currency, one of the most liquid in emerging markets, also came under pressure amid amid a broad selloff in risk assets as US yields jumped to their highest levels in decades.

Read more: Treasury Rout Threatens EM Carry Trade as Citi Pulls Back

“As long as US yields remain high and the market anticipates a more hawkish Fed, it will be difficult for the peso to make a sustained recovery of the ground it has lost,” said Antonio Di Giacomo, a senior markets analyst at XS.com.