Looking to Short the Mexican Peso Despite the Drawbacks

Oct.12.09 | About: CurrencyShares Mexican (FXM)

I have been looking at shorting the Mexican Peso. I would do it via FXM, the CurrencyShares Mexican Peso Trust. The expense ratio of 0.4% is a tailwind for the trade.

Shorting pesos does have a big carrying cost of almost 7%. That is a disincentive, since God knows how long it will take people to realize what a basket case Mexico is.

I am super bearish on Mexico. Militant groups are now setting off improvised explosive devices in Mexico. The drug-trade violence is like a low grade civil war. This violence combined with Mexico's longstanding corruption, discourages tourism and foreign investment.

According to a recent Economist article, oil accounts for 40% of federal revenue in Mexico. Almost a quarter of Mexican oil production is from the crashing Cantarell field. "As recently as 2004, Cantarell, the country’s main offshore field, produced 2.1m BPD of crude. Now its output is just 600,000 BPD." Soon, the country will be a net importer of oil, meaning no more dollars.

I found out something else interesting. The code of federal regulations specifies minimum capital ratios for banks, and risk categories and weights for the assets banks own.

The following assets are considered zero percent risk weight:
(i) Cash, including domestic and foreign currency owned and held in all offices of a national bank or in transit.
(ii) Deposit reserves and other balances at Federal Reserve Banks.
(iii) Securities issued by, and other direct claims on, the United States Government or its agencies, or the central government of an OECD country.
(iv) That portion of assets directly and unconditionally guaranteed by the United States Government or its agencies, or the central government of an OECD country.

So banks are allowed to treat Mexican debt as if it has no risk?

I'll be following up on the peso later.