LONDON, Feb 16 (Reuters) - Even in a year littered with political risks, the re-working of world trade routes with a "friend-shoring" twist and handsome real interest rate premia have Mexico's peso behaving like a supercharged dollar.
Fresh from its biggest annual gain against U.S. dollar since 1989 last year, the "super peso" - which President Andres Manuel Lopez Obrador and others have dubbed it - has climbed 20% on the greenback over the past two years and retained that six weeks into 2024 at least.
Given that the wider basket of emerging market currencies has dropped more than 1% against the dollar over the same period, the scale of outperformance of the world's third most-traded emerging currency is clear.
And as it accounts for almost 14% of the dollar's broad trade-weighted index, that packs a punch.
With both Mexican and U.S. Presidential elections due later in the year and domestic interest rate cuts in the wings, the risks of some reversal may seem obvious.
And yet the peso's interest rate protection remains immense as the Bank of Mexico has so far resisted moves by other big emerging market central banks to pre-empt U.S. Federal Reserve easing - possibly waiting for the Fed to move as it keeps a lid on a near 5% domestic inflation rate.
But that has meant Mexico's key policy rate of 11.25% remains more than twice the Fed equivalent - with a "real" inflation-adjusted rate still more than 6%, more than twice that north of the border too.
Even though regional neighbours Brazil and Chile have already begun slash policy rates since the middle of last year, Mexico has held the line.
Ten-year Mexican government bond yields too still boast a 5 percentage point premium on U.S. Treasury equivalents, with a real yield of more than 4%, almost four times than in the States.
Perhaps those safety buffers are all necessary for potential currency volatility ahead.
Certainly the prospect of Donald Trump's return to White House later this year and his aggressive stance toward Mexican migration will remind of markets of the 10% peso plunge in the two months after his last election in 2016.
And that's after navigating Mexico's own presidential election in June - even though Manuel Lopez's party candidate Claudia Sheinbaum retains a strong opinion poll lead.
But the peso is surfing the risk so far and Mexico's story goes beyond electoral or interest rate cycles.
FRIENDS LIKE THESE...
A re-wiring of global trade due to bilateral U.S.-China rivalry, tariff barriers and investment curbs has seeded a rapid search for third-country hubs for U.S., Chinese and global manufacturers - especially those in key sectors such as chips, autos, electric vehicles and batteries - to locate in instead.
So-called friend-shoring of supply chains to countries that easily access U.S. markets and can accommodate Chinese investment too has put Mexico in pole position, not least since the reworked United States-Mexico-Canada Agreement on trade in 2020.
Mexico - the world's 12th biggest economy in dollar terms - already replaced China last year as the biggest exporter to the United States after 16 years in which China held top spot.
And it attracted some $32.9 billion in foreign direct investment (FDI) during the first nine months of 2023 - up 30% from the same period in 2022 - in what Mexico's economy ministry described as a "historic" high.
Although some dispute the scale of "new" investment in those numbers, given that some three-quarters of that was retained profits from foreign companies already operating in the country, anecdotal evidence suggest FDI is building there.
In just one example from late last year, EV giant Tesla received land-use permits from Mexico's government to build a planned "gigafactory" in the northern border state of Nuevo Leon.
A deep dive into the implications of an increasingly multi-polar world economy by Morgan Stanley economists reckons that Mexico - along with India - stands to be the biggest winners from re-wired supply chains.
They estimate Mexico could see a 30% net gain in exports to the United States over five years and the related investment and manufacturing would raise the country's growth potential by half a percentage point to 2.4% over the same period.
What's more, huge remittances from Mexican workers in the United States - at some $56 billion or 4.5% of national output in 2022 - helped depress the country's otherwise large balance of payments deficits.
Might the peso get too strong to allow all that to happen?
According to researchers at the Dallas Fed, the peso's real effective exchange rate against its major trading partners is already more than 10% above 30-year averages - even though they reckon this was partly a reversal of pandemic-related undervaluation and could take years to revert.
What's more, foreign investor share of Mexican bond holdings has yet to recover from the 10 percentage point drop to 15% around the COVID-19 shock.
But for many currency strategists, the case for staying long Mexican pesos for now remains well founded.
Societe Generale's Bertrand Delgado lauds the peso's "high carry-to-vol" and neutral long-term valuation to an overvalued U.S. dollar.
"Mexico's relatively limited policy uncertainty and the U.S. elections - which will likely be noise but in net terms positive for Mexico given its geopolitical position with respect to China - should also support the peso," he wrote this week, countering fears of Trump-related volatility.
Can the peso remain a "super" alternative for any wary of the dollar or fearful of yuan? 2024 looks to be a pivotal year.
The opinions expressed here are those of the author, a columnist for Reuters
(Editing by David Evans)
