Quiver Quantitative - The Mexican (EWW) peso is experiencing a significant rally, becoming the world's top-performing major currency, largely driven by increasing investments from hedge funds. According to recent data from the Commodity Futures Trading Commission, leveraged funds have significantly ramped up their bullish positions on the peso, with holdings reaching their highest since March 2023. This surge in interest has positioned the peso at the forefront of emerging market (EM) currencies, especially as global market tensions begin to ease, and traders shift their focus towards high-yielding opportunities.
On Monday, the peso led gains among major currencies, appreciating by 0.3% against the U.S. dollar. This rise comes in a period of relative calm in the financial markets following a volatile week influenced by shifting expectations for U.S. interest rates and escalating tensions in the Middle East. The peso's resilience is attributed to its high liquidity and the continuous trading it enjoys being the most actively traded currency in Latin America. Additionally, the expectation that diplomatic efforts might mitigate further conflicts between Iran and Israel has made the peso an attractive 'risk-on' asset for investors seeking to capitalize on emerging market currencies.
Market Overview: -The Mexican peso strengthens, extending its position as the world's best-performing currency. -Hedge funds increase bullish bets on the peso, citing easing global tensions and attractive carry-to-volatility ratio.
Key Points: -Derivatives data shows hedge funds significantly increased their long positions on the peso. -The peso's resilience stems from expectations of de-escalation in the Middle East conflict and a dovish Fed policy stance.
Looking Ahead: -The peso has no immediate technical resistance points, potentially paving the way for further appreciation.
The appeal of the Mexican peso is further enhanced by its favorable carry-to-volatility ratio and the hawkish stance of Mexico's central bank, which together attract significant dollar inflows. Moreover, Mexico's economic integration with the United States provides a stabilizing effect, shielding it somewhat from adverse effects when the U.S. economy posts strong activity data—a situation that typically strengthens the dollar and pressures emerging market currencies.
As of now, the peso stands as the only major currency to have appreciated against the dollar this year, with a staggering 25% gain since the end of 2016. This robust performance sets the stage for potentially reaching the 16 per dollar mark, a level not seen since July 2015. With no immediate technical resistances in sight, the pathway appears clear for continued appreciation, especially if global risk sentiments remain favorable and the U.S. interest rate environment becomes more accommodating.
This article was originally published on Quiver Quantitative