Mexico's peso falters, but attractive local bond yields offer support

By Noe Torres and Ana Isabel Martinez

MEXICO CITY, Sept 29 (Reuters) - Mexico's peso, which some had dubbed the "super peso" after besting rival emerging market currencies to strengthen 6% in the first eight months of the year, has erased all its 2026 gains in just a matter of weeks.

The peso was trading above 18 per dollar on Tuesday, after hitting its strongest level in over two years — 16.8520 per dollar — in early September.

Still, the peso's sharp reversal in September likely reflects profit-taking after months of gains, rather than long-term sustained capital flight, and the Mexican currency may still find support in attractive yields for local bonds, according to analysts.

"We view this more as a correction and reduction in long peso positions than a structural shift in sentiment toward the currency," said Gabriela Soni, head of investment strategy at UBS in Mexico. "The peso had come from a particularly strong position, so there was room for profit-taking."

The US Federal Reserve's interest rate hike earlier this month didn't help matters for the peso.

A narrowing interest rate gap, as the Fed's rate hike was followed by the Mexican central bank keeping its key rate on hold, dampened investor demand for pesos.

The peso could further weaken to 18.5 per dollar, but will likely find support due to attractive domestic bond yields, analysts said.

Mexico's 10-year government bond yield stood at 9.59%, versus 5.27% for the equivalent US Treasury and 3.09% for Japanese paper.

"The carry trade still looks relatively attractive in this environment of uncertainty," said Marco Oviedo, senior strategist for Latin America at XP Investments.