In a tense global economic environment, the prospect of China’s new stimulus program is a ray of hope. The decision to boost the country’s economy could have far-reaching implications for the capital markets, particularly for emerging market currencies such as the Brazilian real (BRL) and the Mexican peso (MXN).
The MXN: Real Return Despite Downward Trend
The Mexican peso has established itself as a strong currency in recent years, not least due to speculative carry trades. These were made possible by low interest rates in currencies such as the Japanese yen, while the MXN, with an interest rate of 11.17%, attracted investors looking for high yields. However, since the summer of 2024, the peso has been on a downward trend as many of these carry trades are unwound.
From a fundamental perspective, however, the MXN remains strong. With a core inflation rate of just 4%, the peso has one of the highest real yields in the world. The peso is even moderately undervalued against the US dollar, which makes it an attractive option for investors despite its recent weakness. For companies with production facilities in Mexico and revenues in USD, a further depreciation of the MXN could represent a long-term buying opportunity. The high interest rate differential between the MXN and USD of over 6% could make foreign currency positions worthwhile in the long term, especially in an environment where production costs in Mexico have a negative impact on balance sheets.
The BRL: Stabilization with Potential
The Brazilian real has recently recovered slightly and could receive a further boost from the economic impetus from China. Brazil is a close trading partner of China, particularly in the commodities sector. Increased demand for Brazilian commodities such as iron ore could support the BRL and strengthen its position against other emerging market currencies. While the BRL has been less affected by carry trades than the MXN, it should benefit directly from economic developments in China.
No Clear Trend, but Opportunities for Investors
Current developments on the markets do not show a uniform trend. While some Asian emerging market currencies have gained strength, the MXN remains under pressure and the BRL is showing a slight recovery. In an environment in which carry trades continue to weigh on the system, there are nevertheless interesting opportunities for investors.
The MXN offers long-term potential due to its high real yield and possible undervaluation against the USD. The BRL could stabilize and appreciate further due to its strong trade relationship with China and the potential demand for commodities. This could be the right time for companies and investors to consider long-term positions in these currencies. Hedging of receivables should be kept to a minimum as hedging costs weigh heavily, even more so if the real remains firm.
India and the Shadows of the Chinese Revival
While the BRL could benefit from China’s economic stimulus, things look less rosy for India. The Indian rupee has already experienced a continuous devaluation in recent years. The flow of capital towards China could reinforce this trend, as China is becoming increasingly attractive to investors. India could lose further competitiveness as a result, while China attracts significant capital over the next 18 months.
Translated with DeepL.com (free version)
