Pressure builds for Mexico interest rate rise as funds sell peso

viernes 20 de mayo de 2016 12:37 GYT

* Peso performance

* Three-month interest rate swaps

LONDON/MEXICO CITY May 20 (Reuters) - Mexico has become an emerging markets weak link, with authorities facing mounting pressure to jack up interest rates to defend the peso, viewed by investors as a cheap proxy for taking short positions in other emerging currencies.

Long a favourite with bond investors, Mexico's fortunes turned this year, with the peso repeatedly under attack, forcing an extraordinary intervention in February along with a 50 basis-point rate rise.

While that move smoked out speculators, pressures are building again. Bets against the peso quadrupled in the week to May 13, according to latest available data from the Commodity Futures Trading Commission (CFTC) which shows 45,000 net short positions, roughly equating to $1.2 billion.

The peso has lost 8 percent this month, the worst emerging currency performer after the rand, this chart shows:

That is piling pressure on the central bank to raise interest rates, reflected in the recent swift move higher in Mexican interest rate swaps (IRS), essentially derivatives that reflect market expectations for interest rates in the future.

Three-month IRS for instance has risen to 4.22 percent, up from 4.10 percent two weeks ago:

"What the market is saying is the only way they are going to get dollar/peso lower is via an emergency rate hike," Commerzbank's head of EM research, Peter Kinsella, said.   Continuación...