Mexican Investment Opportunity

by | Oct 4, 2009 | Multi Currency Investing

Mexican pesos offer opportunity now.

My favorite dollar chart from shows that long term… it has always been correct to bet against the US dollar.


Speculators, however, have to beware because that pesky upwards spike in 1970s-1980s lasted for almost ten years.  Ten years is a long time to fight a position.

We saw another such spike in 2008… but since, the US dollar has been collapsing again.

The charts below from tell the story…

The euro…


Dollar – Euro Chart

The yen…


Dollar – Yen Chart

In June and August our messages here looked at the value of investing in Brazilian real bonds that paid up to 12%.   The chart shows how well that has worked!


Brazilian Real – Dollar Chart

Now the dollar is under serious pressure and has been at lows of the year for a couple of weeks.  The dollar’s low interest rate and weakness make it attractive to borrow. This borrowing magnifies the natural weakness created by American debt and negative trade balances.

There is nothing to suggest that the dollar will do anything except remain under pressure in the short term.

However keep in mind that the large amount of borrowing also creates a built in volatility.  If the market perceives dollar strength or weakness in higher risk investment markets, everyone rushes to exit their loans (which means they buy dollars).    This can cause dollar upstrokes in the short term… so if you borrow dollars or short the dollar, keep some liquidity in reserve or watch your position very closely so you are ready to bolt at a moment’s notice.

In May Jyske Global Asset Management recommended taking long positions in NOK and AUD and they have both performed very well with increases
of 9% and 12% respectively.  They still have both currencies in their managed portfolios.

However I am reducing my considerable exposure to European currencies in which I currently have an overweight position.

Here is the currency breakdown of my liquid portfolio.

US$ 15.0%
CAD  4.0%
NZD  2.0%
AUD    0
Dollar Bloc 21.0%

GBP   8.0%
DKK  18.0%
SEK   4.0%
EURO 32.0%
Europe Bloc   62.0%

TRY 4.0%
HUF 7.0%
BRL 6.0%
Emerging Bloc 17.0%

JGAM advises increasing non US dollar exposure with a short USD/MXN position so this is the currency I am looking to add.

The MXN (Mexican peso) has depreciated 25% versus the greenback since the beginning of the 2009. You can see that loss… and a bit of recovery in the chart below.


Dollar – Mexican Peso Chart

A Morgan Stanley analysis suggest that the peso will catch back up.

The Mexican government has an ambitious budget that will help if they stick to plan.

The peso is always heavily affected by US economics so the bad American economy hurt the peso more than it hurt the greenback.  In reverse an economic improvement in the US in 2010 should have more positive impact on the peso than on the the dollar.

The other nice part is that Mexican government bonds are paying around 8% right now. Here are two issues on Jyske’s bond list.

MEXICAN BONOS   8%   17-12-2015  selling at 102.20 yields 7.54%
MEXICAN BONOS 10%   05-12-2024  selling at 116.00 yields 8.14%

If you invest $100,000 in these bonds (say at 8%) and borrow $100,000 at 3% your return looks like this.

$200,000  Mexican bonds pay at 8%   $16,000

Interest on 3% $100,000 US dollar loan $3,000.

You earn 13,000 a year or 13% return… plus have a chance for a forex gain (though you could have a forex loss also).

JGAM last recommended buying the MXN at the 13.550 level with a target of 12.0000 or a 11.4% correction against the dollar.   They suggest putting a stop loss at 14.4000 (a 6.4% loss) versus the dollar.

Jyske funded their Mexican peso investments by selling US dollar and British pound assets.

US resident investors cannot buy these bonds but can hold Mexican peso cash.

Another alternative is to invest in the The CurrencyShares Mexican Peso Trust (Symbol: FXM).

The price of FXM has risen 5.19% this year and is up 3.06% in the last 6 month 3.06% though it is down  -13.59% over the last 12 months reflecting the peso’s drop.


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