MEXICO CITY, Sept 3 (Reuters) - As central banks across the globe cut interest rates, Mexico’s policymakers still have room to lower borrowing costs by as much as 100 basis points before the peso becomes less attractive than other currencies, fund managers and financial analysts say.
The spread between the key interest rate in the United States (2.0%-2.25%) and that of Mexico (8.0%) stands at 600 basis points, the third highest in the world after Argentina and Turkey and its highest level in a decade.
Mexico’s central bank, known as Banxico, hiked the target rate by 525 basis points from Dec. 2015 to Dec. 2018, faster than most of its peers, attracting capital to pay down the national debt and protecting the peso from a precipitous fall.
Banxico cut its main lending rate by 25 basis points to 8.0% last month, the first reduction since June 2014.
“With the rest of the world cutting rates as well, even if we saw Banxico cut rates, you know a 100 basis points in the next six months, I still think the Mexican peso will be the most attractive carry currency,” said senior Rabobank analyst Christian Lawrence, although more cautious observers saw the bank’s margin as smaller.
So-called carry trades are a strategy in international currency market transactions and debt markets to borrow money in a country with lower interest rates and invest it where rates are higher.
“Now, that is not to say that we can’t see all carry currencies sell-off, which is what we are seeing at the moment, but from a relative perspective the Mexican peso is still the most attractive,” Lawrence said.
The peso is hovering around 20 pesos per U.S. dollar, far from its historic low of 22 pesos in the wake of President Donald Trump’s election victory.
Warnings from credit rating agencies of further downgrades to Mexican sovereign debt as well as that of state-owned oil company Pemex, due in part to fallout from U.S.-China trade tensions, have had only a limited impact so far on the peso.
“Even though the Bank of Mexico has cut rates, it still is a very high level of carry. Our base case is for another 50 basis points of interest rate cuts from the Fed through the end of the year. I think that gives more flexibility to the Bank of Mexico,” said Bradley Krom, research director at WisdomTree.
Alejandro Saltiel, also a specialist at WisdomTree, which manages about $6 billion in emerging markets, said the main factor in his models is “momentum” and that he favors the peso.
Saltiel estimates that by September the currency will fluctuate between 19.50 and 20 pesos to the dollar. (Reporting by Abraham Gonzalez; Writing by David Alire Garcia Editing by Sonya Hepinstall)