By Ira Iosebashvili in New York and Anthony Harrup in Mexico City
Mexico's currency fell to a record against the dollar Monday,
illustrating the downside of popular emerging-market trades at a
time of anxiety about higher interest rates in the U.S.
Touted for years by Wall Street strategists and bond investor
Bill Gross, the peso has failed to deliver even though Mexico
stands to benefit from a strengthening U.S. economy.
The reason: The peso is relatively easy to trade. That has lured
investors to the peso in the past, but now it has become a
double-edged sword as money managers seek ways to bet against other
emerging-market currencies such as the Russian ruble.
Many investors are wagering against the peso because they
believe a rate increase by the Federal Reserve will drain money out
of risky emerging markets and cause developing countries'
currencies to weaken. Because it is difficult to place bets against
many emerging-market currencies, the peso is bearing the brunt of
investors' scramble for protection ahead of any move on rates.
"That's the frustrating thing if you're a peso bull," said Win
Thin, a senior currency strategist at Brown Brothers Harriman. "The
fundamentals are solid, but the currency still gets clobbered."
At one point Monday, one dollar bought 15.8636 pesos, according
to data provider CQG. That is a record low for the Mexican peso
against the dollar. In 1993, the government redenominated the
currency after a damaging bout of inflation. Monday's level
compares with 15.711 against the dollar late Thursday.
Foreign-exchange markets were open Friday, but trading was thin due
to the Fourth of July holiday in the U.S.
The peso is down more than 6% against the dollar in the year to
date, compared with a 0.6% decline in the MSCI emerging-market
currency index.
The surprising decline is the last example of how the reversal
of extraordinarily accommodative central-bank policies, put in
place during the 2008 financial crisis, is overriding economic
fundamentals in foreign-exchange markets.
Mexico's official forecast calls for 2.2% to 3.2% economic
growth in 2015. While that is lower than previous estimates by the
government of President Enrique Peña Nieto, it points to faster
growth than in other Latin American economies. The International
Monetary Fund expects Brazil to contract by 1%, while Argentina's
gross domestic product is pegged to fall 0.3%.
In June, Mr. Gross, now at Janus Capital Group Inc., said the
peso is between 15% and 20% undervalued. Mr. Gross also lauded the
peso's fundamentals last year, when he was at Pacific Investment
Management Co.
"The peso's PR is pretty good, but the reality is somewhat less
compelling," said Luis Maizel, co-founder and senior managing
director at LM Capital Group LLC, which manages about $6 billion.
Mr. Maizel bought the peso in 2012, when the new administration
took office. He sold a year later and has avoided the currency
since.
While many market watchers say the peso's ease of trade is a big
contributor to the recent selloff, other factors also are at
play.
Benito Berber, a Latin America strategist at Nomura, said the
uncertainty following the Greek no vote also helped push down the
peso on Monday.
With more than a third of local Mexican government bonds in the
hands of foreigners, investors tend to use the currency market to
hedge the risk of holding peso-denominated debt, "because they see
the economy as positive and don't want to sell the bonds," he said.
That puts downward pressure on the peso.
More lasting damage could be caused by the decline in the price
of crude oil, one of Mexico's biggest exports, analysts said.
Mexico's central bank has taken steps to control the peso's
decline. The Bank of Mexico has been in no hurry to raise interest
rates, given the slower-than-expected economic growth and with
inflation just below its 3% target. But the foreign-exchange
commission, which includes central bank and finance officials, has
taken other measures to support the peso.
Since March, the central bank has been selling $52 million a day
to supply liquidity to the exchange market and auctions $200
million on days when the peso weakens 1.5% from the previous
session. The conditional $200 million auctions have been triggered
only twice since the mechanism was activated in December.
Write to Ira Iosebashvili at ira.iosebashvili@wsj.com and
Anthony Harrup at anthony.harrup@wsj.com