Selling a currency short, or any security for that matter, can be a good strategy to enhance investment returns. You go short, the security goes down, you make money. Companies like Etherfuse offer this product in currencies and bonds to a wide range of investors.
Given US tariffs and all the volatility being created, there are probably some good short selling opportunities at present. The first one that comes to mind is shorting CETES or the Mexican peso. Mexico IS getting hit with tariffs and that is not good for their currency.
Prior to the tariff announcement, the mere mention of tariffs sent the peso down in value
Now, tariffs are here. Should an investor short the Peso against the US dollar (bet the peso goes down in value versus the US dollar)?
This is a tempting trade. Mexico has been lowering interest rates and tariffs are bad, but if we look closer it may not be a great idea.
First, tariffs are here, and they are inflationary for the US economy. The longer they are in place, the more inflation in the US. As inflation goes up and stays up, the attractiveness of the US dollar goes down.
This may take some time, but higher inflation will impair US dollar value, making the Mexican peso look less bad, not great, just less bad.
The key questions are how far the peso can go down and how long will that take.
If you buy US dollar tokenized bonds from a company like Etherfuse, you get an annual yield of about 4.17%. If you buy CETES in Mexico in local currency you get a 7.7% annual yield.
One unit of Mexican currency gets you 3.5% more yield. This is significant. A higher interest rates on pesos protects against peso weakness versus the US dollar.
Based on this, the Mexican peso must weaken 3.5% to make the short trade profitable trade on an annual basis.
On the day of tariff announcement, the peso weakened 2% and hit a low of minus 2.7%.
Even the worst price of the day on the US dollar versus Mexican peso the day of tariffs would not have made it a profitable trade. It did not even get close to the -3.5% needed for a profitable short peso, long US dollar.
The key for a good short currency trade, or any trade for that matter, is momentum. The investment price must move quickly, gap quickly, power through support levels. The peso doesn’t seem to have the gas to get there.
It seems there has been too much time for investors to make their conclusions and act.
On the face of it, a short peso trade seems a good idea, with tariffs and everything. But the Mexican economy may be more stable than most think, and the peso less in danger of going down in value.
Short-term long Mexican CETES still seem to make sense given the yield different with the US dollar, despite all the tariff noise.
This blog is for educational and informational purposes only, covering general market trends, industry developments, and asset features. Nothing herein is investment advice, a solicitation, or a recommendation to buy or sell any assets. Etherfuse and its guests may hold stakes in some or all of the assets discussed.
