“The result is a six-sigma event, with the peso currently undervalued by around 50% relative to its long term mean deviation from the purchasing power parity rate, which puts the Mexican currency back at a level not seen since the depths of the Tequila crisis,” according to a Gavekal Research note posted by Dimitra DeFotis of Barron’s. “The difference now is that Mexico’s fundamentals are relatively healthy, certainly compared to 1994 when the country was effectively bankrupt. In other words, the worst case scenario—and more—is currently in the price.”
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Investors who believe the Mexican peso may continue to depreciate but anticipate the markets will improve can look to currency-hedged ETF strategies to diminish the currency risks. For instance, the db X-trackers MSCI Mexico Hedged Equity Fund (NYSEArca: DBMX) and the recently launched iShares Currency Hedged MSCI Mexico (NYSEArca: HEWW) provide exposure to the Mexico’s market without the added currency risk of a depreciating peso currency.
For more information on the Mexico ETF market, visit our Mexico category.
iShares MSCI Mexico Capped ETF (NYSEArca: EWW)