Money-Minting Peso Trade Upended by Mexico’s Election Shock

Automotive Author: EqualOcean News Editor: Leci Zhang Jun 06, 2024 02:41 PM (GMT+8)

With the conclusion of the Mexican election, Claudia Sheinbaum's victory shook the market, which increased market volatility and made investors uncertain about Mexico's future economic policies, resulting in a sharp decline in appreciation expectations for the peso.


EqualOcean reports that over the past two years, global fund managers have discovered a lucrative strategy in Mexico: borrowing in low-interest regions and reinvesting in Mexican assets, profiting handsomely from the appreciation of the peso. However, the stability of this model has suddenly become uncertain.

Claudia Sheinbaum's victory in the presidential election has shaken the markets. This win has strengthened the ruling party's legislative power, increasing the likelihood of implementing the unrealized reforms of former President Andres Manuel Lopez Obrador, such as changing the selection process for Supreme Court justices and eliminating independent regulatory bodies. Hari Hariharan, Chief Investment Officer at New York's NWI Management, remarked, "The days of unwavering Mexican peso appreciation are probably over,"

The election results have heightened market volatility and filled investors with uncertainty regarding Mexico's future economic policies, sharply reducing expectations for the peso's appreciation. This week, the Mexican peso fell significantly, with a 5% drop marking its largest two-day decline since 2020. After a more than 6% plunge on Monday, the Mexican stock market saw a rebound, but selling pressure persisted on Tuesday. The one-month implied volatility indicator for the peso reached its highest level since last October, and the risk premium on Mexican assets also increased.

EqualOcean warns investors that while the peso's crash might be temporary, political risks can quickly undermine investment strategies in emerging markets. Although Sheinbaum's victory was largely anticipated, the ruling coalition's acquisition of a two-thirds majority in the lower house and nearly two-thirds in the Senate enables Congress to pass more of Lopez Obrador's radical economic and political reforms.

Sheinbaum has confirmed that Finance Minister Rogelio Ramirez de la O will continue in her administration, but she has remained silent on specific policies. Investors are waiting to see whether she will adopt more market-friendly strategies than Lopez Obrador or support constitutional reforms that consolidate the ruling party's power and increase economic intervention. Ramirez held a conference call with investors to alleviate their concerns, but the meeting failed to address the market's most significant anxieties.

Shamaila Khan, Head of Emerging Market Fixed Income at UBS Asset Management, stated that the government has an important mission, which can be used positively or negatively. She had been cautious about Mexico before the vote. Traders are now focusing on a critical period starting in September when the new legislature takes over while Lopez Obrador remains in office, suggesting that some reforms could be passed before Sheinbaum officially takes office in October.