BackAs Donald Trump falters, a few hedge funds win big on Mexican peso bets
Hedge funds are reaping a quick profit as Donald Trump's mounting campaign woes turn the peso into the world's hottest currency
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New York: As the Mexican peso plunged day after day against the dollar last month, a handful of hedge funds took notice. The peso, they decided, was being overly punished by investors concerned that Donald Trump would win the election and go through with his plans to overhaul US relations with its southern neighbour.
Now, just a few weeks later, those funds—including Callaway Capital Management, North Asset Management, One River Asset Management and Sagil Capital—are reaping a quick profit as Trump’s mounting campaign woes turn the peso into the world’s hottest currency. It has jumped about 5% since touching a record low in the lead-up to the first presidential debate late last month.
While there were an array of factors attracting each of the hedge-fund managers to wager on the peso, a common denominator for all of them was what they believed to be the market’s overestimation of Trump’s chances of defeating Hillary Clinton in next month’s vote. Their assessment was quickly rewarded as Trump was deemed to have been beaten in the first debate and then as revelations of his degrading comments about women sunk his slumping campaign into a full-blown crisis late last week.
“There are another dozen reasons I like Mexico, but Trump makes it much easier," said Daniel Freifeld, a partner at Washington-based Callaway. He cited the nation’s low inflation and ability to adapt to lower oil revenue, and said he’s betting on the currency through a basket of peso-denominated stocks and bonds.
The nation’s currency has been a bellwether for investor anxiety about the November presidential election, falling when Trump advances in polls and gaining when he slumps. It has depreciated more than any other major peer tracked by Bloomberg this year after the British pound, partly because of Trump’s proposals to renegotiate or end trade deals with Mexico and block remittances to force the country to pay for a wall along the US border.
Worry ‘wall’
“There’s been enough worry created about the possible great wall of Mexico" that the peso “is a very good value in markets today," Julian Robertson, whose Tiger Management was once one of the world’s largest hedge funds, said 4 October at a conference in New York.
Even after the peso’s 2% surge in the second debate’s aftermath to 18.93 per dollar Monday, the real effective exchange rate—the peso’s trade-weighted value versus a basket of other major currencies, adjusted for inflation—shows it’s undervalued compared with historical norms. The measure fell to the lowest since 2009 on 26 September, according to a Barclays index, before rebounding slightly. It’s still 13% below its five-year average.
The punishment the peso suffered as Trump gained in the polls earlier this year means it has room to appreciate to 17.3 per dollar if Clinton wins the election, according to Nomura Holdings Inc. Itau Unibanco Holding SA is only slightly less bullish, envisioning it would trade at 17.5 if Trump loses.
The peso has lost almost a third of its value in the past two years as the price of oil fell and the country’s debt levels rose, prompting Moody’s Investors Service and S&P Global Ratings to put a negative outlook on Mexico’s credit rating. It’s also been driven lower by speculators who use it to hedge against global risks, because it’s easy to trade and shorting it is relatively cheap due to Mexico’s low interest rates.
George Papamarkakis, the chief investment officer at North Asset Management, said the peso could strengthen as much as 10% after the election and that he would add to his long position in the currency during any bouts of weakness before then.
Downside ‘capped’
“The probability of a Trump presidency, especially given what we’ve seen over the past few days, has gone down," said Papamarkakis, who manages nearly $1 billion of assets. “The downside is capped unless the polls shift."
Most other investors have missed the rally. Futures traders increased their net short-peso positions over the past month to 85,892 contracts as of 4 October, according to Washington-based Commodity Futures Trading Commission. The bearish bets reached a record 89,342 contracts on 20 September.
Bradford Jones, who manages the Latin American Opportunities Fund at Sagil Capital, says that while the peso has been beaten up by the Trump effect, local stocks haven’t seen similar declines.
Last month, he put on a so-called relative value trade that uses options to bet that the exchange rate will rally as Mexican stocks fall. Stocks have advanced over the last month, but overall he’s made money on the trade because of the position in the peso, he said.
Trump’s troubles became clear Monday when a new poll by NBC and the Wall Street Journal—taken after the 7 October release of a 2005 audiotape where Trump described in vulgar terms unwanted advances on women—showed Clinton with a 14-point lead in a head-to-head match-up, the largest gap so far in that survey.
Improved fundamentals
Adding to the peso’s prospects is the willingness of Mexico’s central bank to increase interest rates to support the currency. Banco de Mexico has boosted rates by 1.5 percentage points this year and could raise them another quarter of a point by year-end, according to swaps traders.
“Mexico’s really suffered for a lot of reasons but we think a lot of the fundamentals have improved slightly," said Chase Muller, a money manager at One River Asset Management who’s using options to bet on the peso. One River oversees $730 million from Greenwich, Connecticut.
He’s protecting his investment with a position against the Canadian dollar, which he says should also sell off if Trump wins the election and seeks to revise deals with the US’s main trading partners.
“We’re not super bullish, we just think tactically we get this kind of recovery at the right time," he said. Bloomberg
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