Core Viewpoint - The Mexican peso has emerged as a significant beneficiary of the recent global carry trade revival, driven by expectations of Federal Reserve rate cuts and a weakening dollar, making it the top-performing emerging market asset in the past three months [1][4]. Group 1: Currency Performance - The peso appreciated by 4% against the dollar over the past three months, recovering from a low of 21 pesos per dollar after the announcement of a 25% tariff on Mexico by the U.S. in February, now trading around 18.5 pesos [1][4]. - The peso's recovery has erased losses since Trump's election and positioned it as a core beneficiary of the resurgence in carry trades [1]. Group 2: Trade Relations and Agreements - Mexico's relative success in U.S. trade negotiations, particularly through the USMCA agreement, has allowed it to secure tariff exemptions on most goods and a 90-day extension on Trump's "reciprocal tariffs" policy [4][5]. - Analysts note that Mexico has managed its relationship with the U.S. more effectively than other countries, contributing to the peso's strength [4]. Group 3: Factors Driving Carry Trade Revival - Three key factors have contributed to the renewed interest in carry trades: 1. Weak U.S. employment data has heightened expectations for a Fed rate cut in September, lowering the cost of borrowing in dollars [5]. 2. The interest rate differential between emerging markets and developed countries is significant, with Mexico's central bank rate at 7.75% compared to a lower U.S. Treasury yield [6]. 3. A notable decrease in market volatility has made carry trades more appealing, as indicated by the decline in the dollar-peso exchange rate volatility index [6]. Group 4: Institutional Investment Trends - Global asset management firms are reallocating investments towards high-yield markets like Mexico, with emerging market bond funds seeing consistent inflows over the past four months, peaking at $1.7 billion in a single week [7]. - Leveraged funds have increased their bullish bets on the peso to the highest level in nearly a year, reflecting confidence in the currency's high-interest environment [7]. - Latin American currencies, including the peso, have shown strong performance in carry trade yields, significantly outperforming those in Europe, Africa, and Asia [7]. Group 5: Market Sentiment and Risks - The overall strength of the peso and Mexican assets is primarily driven by a weak dollar environment and high carry yields [8]. - Despite positive trends, U.S. trade policies remain a potential risk factor, although recent fluctuations in Trump's policies have somewhat alleviated concerns [8].