Investors Ramp Up FX Hedges on Mexico Debt as US Election Looms

Naomi Tajitsu and Michael O'Boyle
·2 min read
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(Bloomberg) -- Traders are already positioning for the risk that the Mexican peso will suffer if Donald Trump wins the US presidential election.

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About 36% of investors’ exposure to Mexican debt is currently hedged against a weaker peso, according to data from State Street Bank and Trust Co. That’s near the highs of last year hit around July, when currency volatility was picking up around the globe.

Markets are concerned a second Trump administration would lead to more friction between Washington and its biggest trading partners, including Mexico, and raise tensions over the immigration crisis on the border. State Street’s data indicates investors won’t get caught out like they did in the November 2016 election, when Trump’s victory sent the peso plunging 9% and they only had hedges on 5% of their debt exposure.

“While the US election is still many months away, investors may feel the need to have a relatively high hedge ratio on their fixed income holdings sooner rather than later,” said Michael Metcalfe, global head of macro strategy at State Street.

The peso tumbled 2% on Jan. 16, when Iowa voters gave Trump victory in the first of the Republican caucuses. It fell again on Tuesday when he won in New Hampshire.

Data from State Street shows that global English language media coverage on the US election at the start of 2024 is roughly twice as high as it was in 2016, which Metcalfe said was a sign that election risks were already on the radar of some investors.

Still, the jump in hedging could also be fueled by other factors such as more funds taking fully-hedged positions in peso bonds, or concerns that too many people have been betting on a stronger peso amid the recent uptick in risk aversion.

Overall, bets for further peso appreciation have been piling up since late last year, according to weekly CFTC data. A build-up of long positions signals a growing risk of a reversal, which could aggravate a move lower in the currency.

The peso posted a record 15% rally versus the dollar last year, but jitters ahead of the US vote — and Mexico’s own presidential election in June — have given some investors reason to ease exposure to the Latin American nation. Some have also been pulling money out of a popular exchange-traded fund which invests in the country.

“The approach many are taking, including myself, is to use any over appreciation of the peso to buy some cheap insurance,” said Alejandro Silva, chief investment officer at Silva Capital Management in Chicago. Investors can’t “blindly leave peso investment positions without a hedging plan.”

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