Bets that the Mexican peso would appreciate were once one of the most popular emerging-market currency trades. Not anymore. The peso plummeted against the dollar in June, as investors fled emerging markets across the board on worries the Federal Reserve could taper its bond-buying stimulus program later this year. Such ultra-loose monetary policy in past years had helped drive investors to seek better returns in higher-yielding assets like the peso. From its 2013 high in May to its low for the year on June 20, the peso weakened 12.8% against the dollar, according to CQG.
The peso’s former popularity ended up hurting it, analysts say. As the emerging-market rout took off in late May and June, many investors had to liquidate their biggest positions, making their hefty bets favoring the peso victims of the risk unwind. “There has been a dramatic clearing of positions in the peso,” Brown Brothers Harriman analysts said in a recent note to clients, highlighting that the peso had been the largest gross long speculative currency futures position.