Salient to Investors:

The Mexican peso has gone from the world’s strongest major currency to the weakest amid growing investor concern US demand will diminish.

X-Trade Brokers Dom Maklerski expects another 3.9 percent depreciation by September and Bank of Nova Scotia recommends selling the peso. Futures traders are cutting bullish bets at the fastest rate since June.

Economists project the peso is vulnerable because Mexico will expand 3.6 percent next year, the least since the 2009 recession.

Guillermo Ortiz at Grupo Financiero Banorte said the peso is a very good indicator of the risk-on, risk-off mood that markets have been displaying lately.

The Bank of Nova Scotia recommends clients sell the peso due to crowded positioning and “uncertainty” over US debt talks and global growth.  Morgan Stanley advises using options to buy insurance against a deeper sell-off. X-Trade predicts the peso will decline to 13.71 per dollar by the end of September.

The median estimate of over 25 analysts expects the peso to strengthen to 12.8 per dollar by Dec. 31 and to 12.4 by year-end 2013. JPMorgan Chase expects 11.9 by September. Economists predict the central bank won’t reduce benchmark interest rates in the next year.

Thomas Kressin at Pimco likes the fundamentals of Mexico and says the peso is attractively priced and will rise against the dollar and the euro.

The IMF estimates Mexico’s debt at 43 percent of GDP versus 107 percent for the US.

Adrian Owens at GAM said recent peso weakness shouldn’t detract from the bigger picture of an incredibly competitive currency, a very supportive monetary and fiscal backdrop, decent economic data, growth close to 4 percent in 2012, and sound public finances.

Bets by hedge funds et al on a gain in the peso versus a decline is shrinking. The CBOE Volatility Index indicates the peso is the most sensitive of any major currency to shocks to the global economy.

Stephen Jen at SLJ Macro Partners said the Mexican peso has more downside than upside.

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