Rate Hike Could be a Positive for Mexico ETF

Shares of the iShares MSCI Mexico Capped ETF (NYSEArca: EWW) surged 3.8% yesterday on volume that was about 50% above the 90-day trailing average after Mexico’s central bank surprisingly raised interest rates in a bid to stem the peso’s lengthy slump.

Banxico raised its interbank borrowing rate by 50 basis points to 3.75% in a surprise move Wednesday. While the yield on local 10-year bonds was flat at near 6%, the peso rallied against the dollar, and the Mexican stock market is higher, having recovered from initial losses,” reports Dimitra DeFotis for Barron’s.

Mexico is at risk as its reserve coverage ratio, or foreign exchange reserves divided by its funding gap, is just 1.6 years, which is less than the seven years of Russia, another oil exporter. Additionally, Mexico is constrained by its near-zero real interest rate, leaving little room to cut rates if its economy weakens.

According to JPMorgan Asset management, Colombia and Mexico are now members of the so-called fragile five group of emerging markets, edging out Brazil and India, reports Steven Johnson for the Financial Times.

However, there are reasons to believe that Mexico could be perhaps the most reliable Latin American investment destination in 2016.