Carry trade could ease pressures on Mexican peso under Trump

By Noe Torres

MEXICO CITY, Jan 15 (Reuters) - Despite the uncertain future the Mexican peso faces as U.S. President-elect Donald Trump returns to office, analysts believe the country's strong interest rate differential with others like the U.S. makes the currency an attractive investment.

Not too long ago nicknamed "superpeso," the Mexican currency depreciated sharply against the dollar last year after a period of political turmoil in Latin America's second-largest economy.

Mexico continues to attract foreign capital, however, through the so-called carry trade in which investors take loans in the currency of a country with low interest rates to invest in countries with higher ones.

Last year, the government debt market attracted 1.83 trillion pesos ($90 billion), almost 2.5% more than in 2023, equivalent to about 43.25 billion pesos, official data showed.

Even when Mexico's central bank started to progressively lower its key interest rate last year from the all-time high of 11.25%, returns on local debt were still attracting capital from foreign investors.

Demand for these investments had begun to pick up in 2022 when the central bank began a cycle of monetary tightening to deal with an acceleration of inflation after the COVID-19 pandemic.

"We're talking about a rate differential of more than double on a Mexican bond that continues to maintain its investment grade and that is very attractive for any investor," said Humberto Calzada, chief economist for Latin America at Rankia.

It was so compelling to traders that it countered some of the concerns derived from the trade policies Trump has vowed to impose on the first day of his administration, starting Monday.

"The strong interest rate differential continues to make the Mexican peso very attractive," said Jacobo Rodriguez, a financial analyst at Roga Capital. "Let's say it has become a mattress to cushion against this type of aggressive change."

TARIFFS AND NEARSHORING

If Trump makes good on his threats, the currency, which currently trades at around 20.50 per dollar, could weaken to above 21 per dollar and remain there for some time, analysts said.

The fluctuations would also depend on how the president announces any changes, as well as their scope and depth.

Since Trump won his second term in November, the peso has traded between 20.00 and 20.90 per dollar, the weakest since 2022.

It had already started to depreciate sharply after the Mexican elections in June, when the party of President Claudia Sheinbaum paved the way to a series of controversial reforms.

With many reforms already approved, investors have warned that the business climate would become more complicated - despite the nearshoring trend in which large multinationals have moved operations to Mexico.

At the Chicago Mercantile Exchange, investors have been betting on an appreciation in the peso for almost two years, although last week that optimism decreased somewhat.

Analysts consulted in a recent Citi survey expected the peso to close this year at 20.95 per dollar. While this would be around 1.5% lower than where it currently trades, it is up from the 21.00 dollar estimate in the previous survey.

(1 dollar = 20.432 Mexican pesos)

(Reporting by Noe Torres; Additional reporting by Ana Isabel Martinez; Writing by Stefanie Eschenbacher; Editing by Hugh Lawson)

((Stefanie.Eschenbacher@thomsonreuters.com;))