The Perfect Mexican Hedge

I can’t listen to all this talk about Mexican food – another of my favorites – and not mention the Mexican Peso.

Among all the recent news surrounding the Japanese yen and the euro, it seems Mexico’s currency is oft forgotten. Even the ever-popular Swiss franc, or “Swissie,” gets more media attention than the peso, yet the size of Mexico’s economy (14th largest in the world) trumps Switzerland’s (19th largest).

And its exports account for upwards of 30% of Mexico’s GDP – which is twice Japan’s dependency – so there’s a vested interest in a weak peso for the country’s export engine to continue humming along.

While these are all interesting aspects of Mexico’s currency, in my eyes, I see something more important. That is, I see the peso as a great crisis hedge. Here’s why…

Below is a percent-change chart of the S&P 500, along with four major currencies. The time period shown is the market crash of 2008, specifically from October 2007 to March 2009.

So during the crisis, most investors were buying U.S. dollars and, effectively, short-selling the Mexican Peso.

See larger image

As you can see, the S&P 500 lost 52% in those two years. Long-only investors got creamed! But astute currency investors would have made 34% gains in the Mexican peso during that same period.

In my books, that makes the peso a great hedge.

When you compare this big move made in the USD/MXN to other currency pairs, you’ll see even more clearly why this was the best hedge against a spiraling equity market. The Japanese yen gained just 17% during that time and the Swiss franc went absolutely nowhere.

The moral of this story is simple: sell Mexican pesos as the next market meltdown begins.

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Categories: Markets

About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.