Mexico, Colombia peso rebound from lows but risks linger

14 Feb, 2016

Mexico's peso clawed back gains from a record low on Friday after brutal losses during the week as a rebound in oil prices and global stocks lifted battered Latin American currencies. Solid US consumer data on Friday helped stocks on Wall Street rebound while oil prices, which have driven the fortunes of oil producers like Mexico and Colombia, surged back from 12-year lows on a report that suggested Opec might finally agree to cut production to reduce the world glut.
Colombia's peso also recovered from an all-time low, but analysts saw the rebound among emerging market assets as possibly short-lived due to worries about a US recession. Strategists at Citigroup expect concerns about the strength of the US economy to continue to hurt the Mexican peso, since Latin America's No 2 economy sends nearly 80 percent of its exports to its northern neighbour.
"What used to be Mexico's strength - trade linkages with the US - is now turning into a source of vulnerability as US recession risks rise," Citigoup strategists wrote in a note to clients. Mexico's peso gained 1.3 percent, breaking back below the 19 per dollar level after hitting its weakest since a 1993 revaluation on Thursday. Concerns over the global economy persisted ahead of the reopening of Chinese markets on Monday after a week-long holiday for the Lunar New Year.
Many investors who hold Latin American bonds have been selling the highly liquid Mexican peso to hedge against further volatility, driving the currency to underperform its regional peers. The currency has weakened more than 9 percent so far this year, even more than oil-heavy Colombia's peso, which is down about 6 percent. The Mexico peso's deep losses has fostered talk that the country's central bank raise might interest rates to try and support the currency, but Morgan Stanley analysts said in a client note the central bank is more likely to hold additional dollar sales.

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