Mexican Peso Bounces Back

Along side other regional and major currencies, the Mexican peso has recovered as the North American session progressed. Although it is trading within yesterday's ranges, the near-term bias is for additional peso gains.

Since early May the US dollar has traded roughly between MXN12.82 and MXN13.40. Yesterday and today, the dollar tested the upper end of that range. In addition to the broad dollar pullback, the Mexican peso has been helped by a number of factors. Some contacts cite the rally in oil prices, where the front month July contact is near $69 a barrel, the upper end of where it has trading this year. Others cite comments by Finance Minister Carstens who suggested that after another contraction in the current quarter, the Mexican economy is likely to expand in H2.

The Mexican peso has appreciated by a little more than 18% against the dollar since the March 9th announcement to seek a $47 bln line of credit from the IMF, which it has subsequently indicated it may not need to tap into.

Mexico's central bank continues to intervene selling dollars to buy pesos. The $100 mln daily operation will be cut to $50 mln starting June 9th, officials announced last week. The same reason that it may not tap the IMF line is the same reason Mexico will cut back on its intervention: conditions have improved sufficient.

In terms of market positioning, we hear of good hedge fund interest in Mexico. Also, speculators at the IMM in recent years have generally been long pesos. They did run net short positions from late Oct 08 through early April 09. However, since then they have been running modest long positions. At about 23.8k as of a week ago this past Tuesday, the net speculative position is longer pesos than euro and yen put together in the futures market. At its recent peak early last year, the net speculative position was long around 125k contracts.

Next week Mexico reports May consumer prices, which look as if they have eased, and the April trade balance (small surplus). Easing of inflation, coupled with the strong peso may encourage the central bank to cut the overnight target from its current 5.25% when its meets next on June 19th.