“This is more aggressive than most people were expecting. The central bank is waging an unofficial battle to try to support the currency. They’ve been one of the most aggressive central banks in terms of hiking, even at a time when inflation has been below their official target. That’s partly because of a hangover of the Tequila Crisis when a depreciating currency presaged an economic crisis. Times have changed but a depreciating currency brings back bad memories in the minds of many Mexicans,” according to an Aberdeen note posted by Dimitra DeFotis of Barron’s.
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.
There is a chance the pace of rate hikes south of the border slows in 2017.
“Accordingly, there’s nothing here to suggest that Mexico’s central bank is thinking about slowing the pace of tightening. Our forecast is for interest rates to be increased by a further 100bp to 6.75% by end-17, which is above what is priced into the market (6.50%) and expected the consensus (just 6.00%),” according to a Capital Economics note seen in Barron’s.