Where is this carry trade headed now? Plotting the MXN vs. the rate gap between 91-day Mexican bills (cetes) and U.S. Treasury bills reveals the nominal rate premium of the MXN over the USD is the lowest it has been since comparable data became available in 1991. (In case you are wondering, those 70-percent rates in 1995 were real; they were imposed by the Bank of Mexico after the December 1994 collapse of the MXN.)
The 1994 collapse occurred just before the end of the last major U.S. rate-hike cycle and before the inauguration of incoming Mexican president Ernesto Zedillo. The rate gap between the U.S. and Mexico narrowed to the point where international investors felt insufficiently compensated for their time and trouble.
The steady and pronounced decline of the rate gap in 2006 just before an incoming Mexican administration creates an eerily similar risk.
Subscribe to:
Post Comments (Atom)
Post a Comment