(Bloomberg) -- The world’s best currency rally is set to peter out as Mexico’s central bank begins to cut interest rates, according to the currency’s most-accurate forecaster.

Mexico’s peso is up almost 10% in the past 12 months, by far the best performance among 16 major currencies tracked by Bloomberg. It recently touched the highest since 2015, and has defied bearish calls from Bank of America to Morgan Stanley. Funds and asset managers have boosted their bullish bets to the highest level in at least a year, according to derivatives data from the Commodity Futures Trading Commission. 

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All that has left the peso overvalued, with positioning that’s increasingly stretched, said Bartosz Sawicki, market analyst at Polish brokerage Cinkciarz.pl, also known globally as Conotoxia. 

“The Mexican peso should trade sideways from recent levels,” Sawicki said in an interview. “We find it hard to believe that rate differentials in the US and Mexico will stay wide enough to keep the peso’s appeal.” 

Mexico’s central bank cut rates in March for the first time since 2021 to 11%, though it left open the possibility that it might pause monetary easing in some future meetings. Federal Reserve officials, meanwhile, have signaling they’ll begin lowering borrowing costs “at some point this year.” 

While lower rates at home will dampen the peso’s appeal as a carry trade currency, Sawicki doesn’t see it depreciating against the dollar either. Record remittances from the US and strong economic growth should help keep it around 16.5 per dollar in the second quarter of 2024, before retracing to 17 per dollar by year-end — about 2.8% weaker than current levels. 

Sawicki, whose forecast on the Mexican peso ranked top in Bloomberg’s first-quarter accuracy ranking, sees a US soft-landing as the most likely scenario, which will create “a rather benign risk environment for emerging markets.” 

Expectations the greenback will decline should also give the peso some support, he said, adding that Mexican and the US presidential elections this year could boost volatility, with the latter having a bigger impact. 

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“After the US central bank starts the easing cycle, the markets should move to the next big risk event — the US presidential elections,” Sawicki said. That could push investors toward undervalued currencies such as the Brazilian real and Chilean peso, he added. 

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