March 1, 2019 / 4:35 AM / 3 months ago

Mexican peso carving out place in Japan's crowded retail FX market

TOKYO, March 1 (Reuters) - The Mexican peso is steadily carving out a niche in Japan’s crowded retail foreign exchange market despite being a relative newcomer, thanks to its high yields and perceived stability relative to emerging market peers like the Turkish lira.

Data released on Friday by the Tokyo Financial Exchange, (TFX), a major Japanese trading exchange provider for retail margin trading, showed trading in Mexican peso/yen generated roughly 143,000 lots in February, equivalent to roughly 82 billion yen ($734.31 million) based on prevailing exchange rates.

That represents a 64 percent increase in the number of lots traded since the first full month of peso trading on TFX in November 2017.

The peso/yen now generates more trading than euro/yen and it was almost on par with sterling/yen, which was the fifth most traded pair on TFX in February with about 147,000 lots.

Peso volumes at the exchange are gaining on the Turkish lira and South African rand, high yielding emerging market currencies traditionally favoured by Japanese retail investors.

“The peso is luring some of the demand away from the lira in the retail market,” said Yuki Inai, markets group leader at FX PRIME by GMO Corporation, which provides foreign exchange platforms to retail investors.

“The Mexican currency has its own risks, such as the country’s standing with the United States. But retail investors saw the lira’s volatility last year. They consider Mexico’s political and economic situation a little more stable relative to Turkey and South Africa.”

The peso also captured the imagination of retail investors after U.S. President Donald Trump raised the country’s profile by demanding for a wall to be built along the Mexican border, according to FX Prime by GMO.

The lira experienced extreme gyrations in 2018, due to a mix of regional political tension, domestic governance worries and monetary and fiscal policy uncertainty.

There is selective interest among investors for finding yield in emerging markets such as Mexico, Malaysia and Indonesia, according to Bart Wakabayashi, Tokyo branch manager at State Street Bank.

“A lot of people got burned on Turkey last year and that’s probably still something that has stuck in people’s minds,” he said.

Turkey’s interest rate stands at a whopping 24 percent, although analysts reckon the country’s central bank could ease policy going forward on falling inflation, especially as Turkish President Tayipp Erdogan advocates low rates.

Interest rates in Mexico and South Africa are at 8.25 percent and 6.75 percent, respectively.

“The lira just can’t disassociate itself with the ‘Erdogan risk,’ which generates concerns that the country could shift towards monetary easing. In this light the Mexican peso appears as a viable high yielding alternative in the eyes of investors,” said Kota Hirayama, senior emerging markets economist at SMBC Nikko Securities.

“That said, the peso is not without its risks, with Mexico saddled with a growing fiscal deficit and Pemex woes,” Hirayama added.

Mexico’s national oil company Pemex had its credit ratings slashed by Fitch in January, raising fears that the country’s sovereign rating could be threatened in turn by the downgrade.

Editing by Simon Cameron-Moore

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