A Stronger Peso Feeds Mexico Rate Cut Hopes (FXM, EWW, TMX, CX, HMX)

Scott Martin: This has been a major reversal for a lot of emerging market currencies, largely due to central bank intervention. But traders are excited to see the Mexican peso has been appreciating more organically.

The peso has surged more than 4.4% off a 2-1/2 year low in the last week, giving the battered Mexican currency ETF (NYSE:FXM) a lift in the process:

Unlike other countries where central banks are doing all the heavy lifting, this is an encouraging sign because increased “natural” demand for pesos could mean global investors are gearing up to increase their exposure to Mexican stocks and bonds.

In fact, Mexican bonds were one of the few bright spots in a week that saw $2 billion flee global bond portfolios and another $3 billion move out of emerging stock funds and ETFs.

As for Mexican stocks, a reviving peso has two immediate benefits. First, a stronger local currency weakens the impact of imported inflation on Mexican corporations and consumers alike.

Mexico is the biggest importer in Latin America, so the 14% decline in its currency since early July has already caused some pain as each peso buys that much less machinery, raw materials and other products.

Second, a stronger peso gives central bankers more room to cut local interest rates beyond their current record low level of 4.5% without fear of weakening the currency further.

Traders are already pricing in the likelihood of a rate cut by the end of the year, which could give some relief to heavily indebted Mexican blue-chip stocks like Homex (NYSE:HMX), Cemex (NYSE:CX) and Telmex (NYSE:TMX) — all of which are straining under liabilities of 55% to 65% of their corporate assets.

This could finally be the catalyst Cemex in particular has been waiting to see.

And with many constituents of the large-cap Mexico ETF (NYSE:EWW) in the same situation, a rate cut could be the long-awaited turning point there as well:

Written By Scott Martin From Emerging Money

Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the team of Emerging Money to bring you cutting edge global news and analysis.

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