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Peso Ascends With Loonie as Hedge Funds Favor Nafta Currencies
 Chris Fournier & Ye Xie - Bloomberg
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April 05, 2010
| | The peso and the loonie topped all 13 other most traded currencies tracked by Bloomberg in January, February and March. | |
Mexico’s peso and Canada’s dollar are outperforming all other major currencies for the first time since at least 1998 and probably will keep rallying as the U.S. recovery lifts the rest of the world’s largest trading bloc.
The currencies gained 5.9 percent and 3.7 percent against the greenback in 2010’s opening months, rising in tandem with the Intercontinental Exchange Inc.’s Dollar Index for a second straight quarter for the first time in 11 years. Hedge funds and large speculators are the most bullish on the peso and Canada’s loonie since at least April 2008, before the credit crisis swamped Lehman Brothers Holdings Inc. five months later, driving both down as much as 31 percent.
As U.S. stimulus efforts totaling as much as $8.2 trillion lift demand for Mexican engine parts from Alfa SAB in Monterrey and Canadian oil from Suncor Energy Inc. in Alberta, the strength of all three countries’ currencies is demonstrating the North American Free Trade Agreement’s benefits. By contrast, ballooning deficits in Greece, Spain and Portugal weighed on the currency of the world’s biggest monetary union as the euro fell 5.7 percent versus the dollar in the first quarter.
“With U.S. growth resumption, we should see channels of support for the Canadian dollar and Mexican peso assert themselves,” said Sacha Tihanyi, a strategist in Toronto at Bank of Nova Scotia, one of first quarter’s three most-accurate forecasters for Canada’s currency in a Bloomberg survey.
“Trade unions do have an implicit advantage: Each constituent nation can still tailor monetary policy to their specific situation, given that their economic structures may be quite different, whereas a currency-union is bound by a constant policy,” Tihanyi said.
Most Since ‘77
The peso and the loonie topped all 13 other most traded currencies tracked by Bloomberg in January, February and March. The duo and the Dollar Index gained an average of 4.5 percent in the first quarter, the most since 1977. Last year, the greenback fell 14.9 percent in nine months against the euro, yen, pound, Swiss franc, loonie and Swedish krona, the Dollar Index’s fastest decline since 1987.
Mexico’s currency will rise another 2.5 percent to 12 per dollar by Dec. 31, from last week’s 12.3026 close, according to Royal Bank of Scotland Group Plc, the first quarter’s most accurate peso forecaster along with Royal Bank of Canada, which sees it strengthening 4.7 percent to 11.75 in a year.
The loonie, nicknamed for the aquatic bird on Canada’s C$1 coin, will gain 1.1 percent to reach parity with the U.S. dollar for the first time since July 2008, and then appreciate 3 Canadian cents more by Dec. 31, according to Standard Bank and Scotia, two of the first quarter’s three top forecasters on the currency. It closed last week at C$1.0111.
Risk Appetite
Alan Wilde, head of fixed-income and currencies in London for a unit of Baring Asset Management, said the peso and loonie will continue rising because Mexico’s currency looks inexpensive and Canada’s tends to appreciate as risk appetite improves.
“If you have a flexible policy to allow your currency to drift lower on its own, then you can benefit in an economic downturn because your goods trade cheaply,” said Wilde, whose firm oversees $45 billion. “Greece doesn’t have the policy option to use the currency as some sort of stimulus as Mexico and Canada did during the financial crisis.”
The U.S. and Canada enlarged an existing free-trade deal to include Mexico in 1994. Two years earlier, the Maastricht Treaty created the European Union, clearing the way for the 1999 debut of the euro, which is shared by 16 countries.
Trade Triples
Trade among Nafta’s 444 million people amounts to $2.6 billion a day, triple 1994’s level, and the zone generates a combined annual output of about $17 trillion, according to a Web site run by Nafta members. Output in the euro region, home to 330 million people, totals $13.6 trillion.
Consumer spending in the U.S. rose in February for a fifth month and retail sales grew 0.3 percent, the most since November. Payrolls rose by 162,000 workers last month, the most since March 2007, the Labor Department said. The world’s largest economy consumes four-fifths of Mexico’s exports and three- quarters of Canada’s. The three economies will grow 3 percent or more this year, almost three times as fast as the euro region.
Nafta “is recognized around the world as a success,” said John Manley, head of the Canadian Council of Chief Executives and the country’s former finance minister. “Nafta has been a source of strength for the North American economies from the moment it went into effect in 1994. Bear in mind that Canada, the United States and Mexico don’t just sell goods and services to one another. We make things together and sell them to the rest of the world.”
Nafta’s Downside
Critics of the agreement in Congress led by Representative Gene Taylor, a Mississippi Democrat, introduced a bill in February to repeal it, citing a 29 percent decline in U.S. manufacturing employment since 1993. Prior to Nafta, the U.S. benefited from a $1.7 billion trade surplus with Mexico, according to a statement accompanying the legislation. By 2007, Mexican exporters sold the U.S. $75 billion more worth of goods than American companies shipped south of the border. Before being elected president, Barack Obama voiced support for renegotiating the agreement.
Not everyone is convinced the loonie and peso will keep gaining. Median Bloomberg survey forecasts see the loonie falling 3.7 percent by Dec. 31 and the peso gaining no more than 0.4 percent against the dollar as Federal Reserve interest-rate increases make the greenback more attractive. The last two times the peso and loonie simultaneously rose in consecutive quarters, in 2004 and 1999, both weakened in the next three months.
‘Less Enthusiastic’
Canadian Imperial Bank of Commerce, the nation’s fifth largest lender, sees them weaker at the end of 2010 as the world’s recovery falters.
“Slowing global growth makes investors less enthusiastic about commodities currencies,” said Avery Shenfeld, CIBC’s Toronto-based chief economist. Danske Bank, the other top loonie forecaster in the first quarter, sees Canada’s dollar weakening 5.5 percent to C$1.07 by the end of this year.
Sixteen years ago, Canada had the highest debt-to-output ratio among Group of Seven countries after Italy. Moody’s Investors Service cut Canada’s Aaa rating in 1994. The following year, then-Prime Minister Jean Chretien’s Liberal Party of Canada imposed austerity measures that led to 11 straight budget surpluses and reinstatement of the country’s Aaa rating in May 2002. Since then, the loonie has appreciated more than 50 percent.
Opening Competition
After the 1994 peso crisis drove the currency down as much as 40 percent in December and sparked the country’s worst recession in half a century, Mexico’s legislators opened competition in the nation’s railroads, seaports and energy distribution systems to expand exports. The median of 12 estimates sees the world’s 13th-largest economy, led by President Felipe Calderon, growing 3.6 percent this year, the most since 2006, after shrinking 6.5 percent in 2009, when Standard & Poor’s and Fitch Ratings cut Mexico’s credit grade.
“Canada took the tough decisions; Mexico made some too,” said David Watt, senior currency strategist in Toronto at RBC Capital Markets, a unit of Royal Bank of Canada, the nation’s biggest lender. “Those that haven’t are paying now,” he said, referring to countries in Europe with bigger deficits.
Mexico and Canada will have budget deficits equal to 2.6 percent and 2.8 percent of their gross domestic product this year, less than the euro zone’s 6.9 percent and the U.K.’s 12.3 percent, according to median economist estimates.
Both countries have benefited from the rising price of oil, their largest export. Oil closed last week at $84.87 a barrel, up from below $34 a barrel in December 2008. Canada is the largest exporter of oil to the U.S. and sits on the biggest pool of reserves outside the Middle East. The Mexican government, the world’s seventh-biggest oil producer, gets almost a third of its revenue from crude exports.
Bullishness
Speculators had 70,296 more bets that the loonie would rise than contracts that profit from it falling as of March 30 and 73,027 more the week before, when the gap was the widest since October 2007, data from the Washington-based Commodity Futures Trading Commission show.
The bullish outlook reflects an economy growing faster than analysts forecast, lower budget deficits and a banking system that didn’t need government funds during the financial crisis.
Canada is on course to be the first G-7 nation to erase its budget gap following the global recession. Prime Minister Stephen Harper’s Conservative Party outlined plans last month to narrow the deficit to C$1.8 billion ($1.78 billion) in 2014, from a record C$53.8 billion last year.
Sound Financials
The economy grew at a 5 percent annualized rate in the fourth quarter, the fastest pace since 2000. The country’s financial system has been the soundest in the world for two consecutive years, according to the Geneva-based World Economic Forum, and Canadian banks lead 12-month gains on the nation’s equity benchmark, the Standard & Poor’s/TSX Composite Index, which is up almost 40 percent in the past year.
Shares of Calgary-based Suncor surged 8.6 percent last month after Canada’s largest oil company announced plans to take advantage of higher crude prices by increasing output. The Bank of Nova Scotia last week raised its recommendation on the stock to “outperform.”
The peso is riding Mexico’s export-led recovery, said Clyde Wardle, an emerging-market currency strategist at HSBC Holdings Plc in New York. He sees the peso gaining by year-end to 12.25 per dollar.
Mexico reported a preliminary trade surplus of $244 million for February, compared with a median prediction of a $5 million deficit. Industrial production in Latin America’s second-largest economy gained 3.6 percent in January, the most since April 2008.
Transmissions
Alfa, the world’s largest producer of aluminum engine heads, jumped 344 percent in the past 12 months as Mexico’s car production doubled in January from a year earlier and rose more than 50 percent in February. Mexico City-based Grupo Kuo SAB, which makes transmissions for Ford’s Mustang coupe and Chrysler Group LLC’s Dodge Ram pickup, more than tripled over the past year, compared to the benchmark Bolsa stock index’s 70 percent rise.
Bullish bets on the peso outnumbered bearish ones by 109,598 on March 30 and by 109,862 a week before, the most since April 2008. The peso is trading 10.6 percent below its average of 11 per dollar in the past decade even after rallying 26.5 percent from its March 2009 low. Bank of America Merrill Lynch estimates it’s undervalued by 10 percent.
“We expect a marathon of slow and steady peso appreciation,” said Alberto Boquin, an analyst for the bank in New York, in a March 26 note. “Fundamental undervaluation of the peso should correct over time.”
With assistance from Reg Curren in Calgary and Oliver Biggadike in New York. Editors: Phil Kuntz, Dave Liedtka
To contact the reporter on this story: Chris Fournier in Montreal at cfournier3(at)bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka(at)bloomberg.net
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