Big Daddy's Hot Tip

Money Today and More Mañana

For many decades, the first rule of currency trading was "short the peso."  Might it be time to try the reverse?

The short version:  Big Daddy recommends you consider buying Mexican government bonds, the standard ten year version, which are denominated in Mexican pesos.  The current interest rate is 7.61%, which is pretty good these days.

But what about the peso?  Well, it has plummeted.  Right now it takes 21.65 pesos to buy a US dollar, a lot more than the 13-14 pesos it took in 2014, so the peso is much cheaper.  Indeed, it might drop a whole lot more...for a while.  Who knows?  But Big Daddy thinks there will be an end to that process and it will eventually be higher at some point.

Why is it dropping?  Well, they're having a bad year, and on top of that some guy named Donald wants to build a wall.  But, there is a price for everything.  When the price falls too much, even something with bad news can be a good buy.

Some years back The Economist magazine introduced something called the  Big Mac Index as a rough and ready guide to when currencies are overvalued or undervalued.  The idea is that a Big Mac should cost about the same amount everywhere, once you convert the price to the same currency for comparison, say US dollars.  If it's cheap somewhere measured in dollars, then the currency they use there is likely to rise, and vice the long run.  This isn't always right...things are cheaper in poor countries...but it's right a lot more often than you might think.  This guide currently suggests that the peso is one of the most undervalued currencies at the moment, relative to the US dollar:  undervalued by 55.9%.  Even after you adjust for the wealth of the country, which gives you a more reasonable expectation for the shorter term, it's undervalued by 27.7%.

From a simple economics point of view, the low peso is very good for Mexican exporters, and even some new trade barriers won't change that fact.  If the currency stays lower for longer, they will be doing even that much better.  Which makes people want to buy things from Mexico, which (wait for it...) drives up the value of the peso.  Bad news contains the seed of its own good news.

So, in theory (ha!) you have three different ways to make money on this:

(1) You get a big one time boost when the currency rises, maybe 20% or more.

(2) If the panic subsides, the price of the bonds will rise even measured in pesos...normal in recent years would be no more than maybe 6%, so the price might well rise by at least about 16% in pesos.

(3) Plus, you get interest of 7.6%/year until then, to keep you happy while you wait!

If items (1) and/or (2) happen soon, you make a very good return in a very short period of time.

Of course, as always, I might be wrong.  But the risk seems pretty reasonable.  Most investors consider US bonds to be a safe bet at any time, but the peso  would have to drop *another* 39% from here for the Mexican ones to be a worse deal in the next ten years measuring the total return of both choices in US dollars.

If you want an extra margin of safety, wait till the yield gets over 8% and buy then. You can check at this link: