Looking to Short the Mexican Peso Despite the Drawbacks

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.

Comments

[zagrebzagreb:]

At roughly 1 US dollar to 13 Pesos, the dollar is already much stronger in Mexico than it has been for many years... A significant decline in the Peso against the dollar would put the two currencies in a range not seen for decades.

Also, anyone who has done much traveling in Mexico - I own property on the west coast - would have first hand knowledge of just how much improvement Mexico has seen in the last twenty years... Infrastructure is much improved, and life is far less thugish than I've ever seen. Mostly the violence is related to border-cities (Juarez, especially) and is indeed extreme, but as for economic disruption? That has yet to happen aside from some tourism, and on the scale that would effect the currency, it would need to be massive.

I read that Economist article, and yes, the management at Pemex is just atrocious... If anything, the article was kind to the government, its minions and its outlook.... The oil situation is what would cause me to doubt the stability of the Peso more than anything.

Its interesting, though... If you track both the Bolsa (the Mexican market) and the Dow, they tend to move very much in concert. A big split between the dollar and the Peso would certainly show up there as well.... It will be interesting (at the very least) to watch in the next year.

Oct 13 04:07 PM

[Trever99:]

I think the one thing that you did not mention is the fact that the US may find itself in a double dip recession. Roubini has been pushing this as a possibility and I do find it incredibly possible. Lets face it. If the US government weren't spending a trillion dollars in the economy would it have recovered this fast? Ofcourse not.. and the second they pull the plug, which they may have to do in order to maintain stable economic indicators elsewhere.. the US economy could potentially slide backwards for another go round.
How does this affect Mexico? People won't be buying cars, or washing machines, or other large commodities that Mexico does so well in these days. This will have a major affect on taxes.
Secondly is that the media does not do Mexico well. The US and Canadian medias only carry stories about beheadings, and the latest virus. This HAS hurt tax revenues and quite dramatically. My understanding is that vacancy rates this year are up over 20% compared to prior years. I don't see this improving.
Thirdly.. If the US government decides to bring more troops home and staion them on the Mexican border in an effort to aid in the fight against cartels.. the cartels WILL seek other revenues opportunites. This can only mean more extortion from local residents and businesses, more political corruption and more police corruption. This will push Mexico towards failed state and rather rapidly.
Lastly.. and I save the worst for last.. is global climate change. It's the elephant in the room and if you haven't looked in to it.. I can tell you what every study has indicated on Mexico. Bad Bad and more Bad. Crop production will drop. This will have a tremendous impact on society here. In fact the more I read the more I was convinced my days in Mexico are numbered. I've read predictions that Mexico could be collapsed state within 15 years without difficulty. Military dictatorship, sprawling border shanty towns full of starvation and crime, collapsing service infrastructure. There are some really scary scenarios floating and I do believe they could happen.

I don't think crisis brings out the best in Mexicans.. I think in general they take a slightly lower road. I say this knowing full well I have more Mexican family than I do Canadian. I am not optomistic.

Nov 13 08:41 PM