Abe-Bernanke one-two punch crushes carry trade

Mexico’s peso is losing its status as the best carry-trade currency for Japanese investors as the Bank of Japan signals reluctance to boost stimulus while the Federal Reserve weighs curbing its asset purchases.

Investors who borrowed funds in Japan and then bought the peso to take advantage of Mexican interest rates that are about 40 times higher have lost 11% in the past month as the Latin American currency sank. That’s a reversal from the 20% return in the first four months of 2013, the biggest in emerging markets and the most among currencies tracked by Bloomberg after the Icelandic krona. Yields on Mexico’s benchmark bonds due 2024 rose 0.5 percentage point in the past month, the most since the 30-day period ended Dec. 14, 2010.

Three weeks after Fed Chairman Ben S. Bernanke spurred a global rout by saying policy makers could reduce quantitative easing, or QE, the BOJ’s decision to leave its lending program unchanged signaled it was reluctant to add more stimulus. Japanese mutual funds had boosted holdings of Mexican assets to a record to profit from a 19% surge in the peso in the first four months of the year as Prime Minister Shinzo Abe’s bid to revive economic growth sank the yen. The peso has retreated 12% against the yen in the past month.

“There’s this big snapback now,” Vivienne Taberer, who helps manage about $14 billion in emerging-market debt and currencies at Investec Asset Management, said by telephone from Cape Town. Mexico “has been one of the biggest emerging-market overweights, so there’s been quite a big shakeout of that. Some of that has been obviously funded out of the yen because the rates are so low, and the currency was so weak. So obviously that’s been the most painful cross to have been in.”

Uridashi Sales

At $1.4 billion, sales of peso Mexican bonds sold to individual investors in Japan, known as uridashi, this year have already doubled the total in 2012, according to data compiled by Bloomberg. Holdings by Japanese mutual funds, known as toshins, of Mexican assets rose to a record high 364.4 billion yen ($3.86 billion) in May from 93.5 billion yen last August, according to Nomura Holdings Inc.

The peso touched a 4 1/2 year-high of 8.4085 yen per peso on May 10. The Mexican currency fell 1.9% to 7.4093 yen per peso on June 14.

The BOJ left unaltered on June 11 the one-year fixed-rate loan facility the bank has tapped seven times amid a surge in volatility during which yields have jumped from record lows, disappointing some investors. Abe and the BOJ have pledged to defeat 15 years of deflation by pumping as much as 70 trillion yen ($742 billion) a year of new money into the economy.

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