Will Mexico’s peso outperform Brazil’s real?

By Samantha Pearson and Jean Luis Arce

SAO PAULO/MEXICO CITY (BestGrowthStock) – Mexico’s peso has long been the underdog of Latin American currencies due to the country’s reliance on the struggling U.S. economy. But this could be about to change.

Mexico’s hands-off approach to its currency market could favor the peso over the Brazilian real, which Brazil’s authorities are aggressively trying to contain.

This week’s expected fresh round of monetary easing in the United States, which could spur inflows to emerging markets, may be the turning point for the currency pair. The question is: Will much of that deluge of cheap money end up in Brazil, the investors’ old favorite, or can the peso make a comeback?

BUY

For analysts like Win Thin, this is an easy call: Mexico’s currency is one of the most undervalued currencies in Latin America. Against the real, it has lost 18 percent since the depths of the financial crisis in September 2008.

So now may be the time to buy given that Mexico and its main trading partner, the United States, no longer appear to be in danger of sinking back into recession.

“U.S. growth is subpar but I don’t think anyone is worried about a double-dip any more,” said Thin, a senior currency strategist at Brown Brothers Harriman in New York.

Tougher measures against the real’s appreciation could also be on their way in Brazil after former minister Dilma Rousseff was elected president on Sunday.

“The government could make the most of the end of this mandate to take more unpopular measures,” said Raphael Martello, an economist at Tendencias consultancy in Sao Paulo. (http://r.reuters.com/kuv79p: http://r.reuters.com/kuv79p, http://r.reuters.com/kuv79p, http://r.reuters.com/kuv79p)

If the Federal Reserve announces a bigger stimulus package than expected on Wednesday, that could prompt even more currency intervention in Brazil while boosting the peso.

SELL

Brazil still has two things that Mexico does not: rapid growth and one of the world’s highest interest rates.

The Mexican peso is not stronger “because quite frankly the market doesn’t like the Mexican fundamentals”, said Flavia Cattan-Naslausky, a strategist at RBS Securities.

A string of weak U.S. economic data or fresh concerns over Europe could easily put the fragile Mexican economy back in the doldrums. Brazil’s close trade links with China are likely to lend some protection in such a scenario.

Brazil’s benchmark interest rate of 10.75 percent also means the country’s bonds offer some of the biggest returns in the world, and recent intervention measures may not be enough to stop investors from buying them.

The government tripled its tax on foreign bond purchases last month in an effort to curb the inflows that are boosting the real. But in October, Brazil still recorded its second-biggest monthly inflow of dollars so far this year.

(Editing by Dan Grebler)

Will Mexico’s peso outperform Brazil’s real?