An interesting perspective on the Mexican peso

As you may be well aware of, during the last couple of weeks, financial markets have been under considerable pressure, mainly because the collapse of financial institutions such as AIG, Lehman Brothers, Washington Mutual and so forth. Panic has spread throughout the world and Mexico has been no exception. Besides the Mexican stock market, the currency has been considerably affected during the last couple of days, reaching unprecedented levels from which we think are unsustainable.
 
As of today, the Mexican peso is trading against the US dollar around $13 pesos per dollar (with volatility), just a few weeks ago, the peso was trading below $10 pesos per dollar, a depreciation of 30% in a matter of days. Unlike the crisis of 1994, the last time Mexico had a currency devaluation, the current economic outlook for Mexico is quite different, and we believe the peso should strengthen significantly in the following months; here are some points of why we believe this should happen:
 
1)     Mexico’s external debt is around USD$40 billion, and the reserves in US dls amount to close to US$85 billion, more than double the amount of debt.
2)     High oil prices and remittances from Mexican workers in the US will continue to bring a constant and high level of dollars into the Country.
3)     The currency exchange works as a flexible, market - floating exchange, without government controls or restrictions (as it worked in the past), which makes it more transparent.
4)     The interest rate differential between Mexico and the US (Federal Funds overnight rate is at 1.50%, Mexico overnight rate is at 8%), makes it extremely attractive for foreign investors (mainly hedge funds) to take advantage of the so called “carry trade” (borrow in US dollars, invest in Mexican rates and earn the spread between the rates).
5)     The current depreciation of the peso is explained by two factors: the so called “flight to quality” of global investors, and stop losses of both foreign investors and  Mexican companies that were “long” or heavily invested in pesos during the last weeks. THIS STEEP DEPRECIATION SHOULD BE CORRECTED IN THE VERY SHORT TERM.
 
 
Based on all of the factors mentioned above, we from RSH know out of experience that this is a unique opportunity to benefit from the very volatile environment by investing in a very conservative strategy: you can just buy Mexican pesos and hold to those pesos for a few months or even better, you can invest and get the double benefit of an expected appreciation of the peso while earning an interest of your money in pesos.
 
We expect the peso should go back to at least $11 pesos per dollar in the next months, which represents an 18% appreciation potential just by holding pesos against the US dollar.
 
All very positive perspectives especially if you can get for your new financing needs European loans and what you don't use will stay in Mexican Banks. The Mexican Market is for European Investors more attractive than ever.
Most of the Mexican Banks don't hold any positions of US banks or any other instrument that is at risk of defaulting; more than 50% of Mexican funds are invested in Mexican government securities, with low durations and short-term horizons.

Tough times but also exciting opportunities  - do the right move - it will be to your benefit to present your new commercial projects to RSH. We have the solution.
 
Erika Hollerith
www.rshprofessionals.com
RSH Commercial Mortgage Professionals
Hollerith Underwriting Services
Hollerith Investments
 
Nova Scotia, Canada
902-444-6591