MEXICO CITY: Mexico's peso sank to a record low on Tuesday, pressured by what analysts described as bets against riskier assets in general and a move by investors to hedge big positions in local bonds.
The peso fell more than 1.5 percent to 18.9350 per dollar as fears of a global slowdown and concerns about the health of some European banks pushed investors to safe-haven currencies like the Japanese yen and Swiss franc.
Oil prices fell 6 percent, hurting the peso which often trades off oil prices. While Mexico is a major crude producer, its economy is far more dependent on its factory exports.
"There is a lot of panic in the global market," said Benito Berber, an analyst at Nomura in New York, who said the peso's slump "doesn't have a lot to do with Mexico itself."
Mexico's peso is among the most liquid global currencies, which often makes it the most convenient asset to bet against whenever global sentiment turns sour against riskier assets in general.
That liquidity is partly behind why the peso has suffered deeper losses so far this year than Brazil's real, Russia's rouble or South Africa's rand - all currencies linked to countries with crises spurred by poor local policymaking.
The peso has shed nearly 9 percent this year, while the rouble is down more than 7 percent and the rand more than 3 percent. Brazil's real has gained more than 1 percent.
Speculative short positions, such as bets by hedge funds, against the Mexican peso recorded on the Chicago exchange have spiked since late last year and are near their most extreme levels ever.
But even as bets against the peso have climbed, foreign holding of the country's local currency bonds have held steady near record levels, around 2.12 trillion Mexican pesos ($112 billion).
That contrasts to big outflows from other emerging markets.
Foreign holdings of Mexican peso bonds surged eightfold since the 2009 financial crisis as investors cheered Mexico's orthodox fiscal and monetary policy and major economic reforms, like opening its energy sector to private investment.
Now those bondholders are partly responsible for driving the peso weaker as they put on hedge positions to compensate for the weaker peso, said Andrew Stanners, an emerging markets fund manager at Aberdeen Asset Management in New York.
"Mexico is a victim of its own success," said Stanners. "There isn't anything specifically within the fundamentals of Mexico that is a reason for the peso to depreciate so much."
Sergio Luna, an economist at Citigroup Mexican unit Banamex saw low liquidity early this week as exacerbating the peso's move. Markets in Brazil are closed due to the Carnival holiday while markets in Asia closed for the Lunar New Year.
"This is really weird," Luna said, noting that his bank had not seen signs of big bets by hedge funds or real money investors this week.
"This is more offshore, it must be some robots working on risk aversion algorithms," Luna said.
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