El superpeso is back. For the first time since 2002, a dollar buys less than 10 Mexican pesos.

The last time it was this strong, earning the superpeso nickname, it caused alarm for exporters, who thought it wildly overvalued. But once inflation in the two countries is taken into account, it is more overvalued now, even compared with an inflated 2002 base. Prices have risen more in Mexico. To maintain purchasing power parity, the dollar should have risen by 18.7 per cent since 2002.

An overvalued Mexican peso has caused global crises in the past. But this is different, with no official peg, and Mexican policymakers actively trying to stop the overvaluation.

Rather, the problem is that Mexican rates have hit 8 per cent, to fight inflation. That attracts “carry traders” looking for currencies with a high yield – a risky game if the currency suddenly depreciates.

Other emerging markets, led by Brazil and Turkey, with base rates of 13 and 16.75 per cent respectively, have attracted carry traders for years.

Since 2002 (when it was in crisis), Brazil’s real has gained 142 per cent against the dollar. To maintain purchasing parity, the move should have been in the opposite direction, with the dollar gaining 28 per cent.

Turkey’s lira, which unlike the real is not fortified by commodity exports, has gained 45.5 per cent against the dollar. To maintain parity, the dollar should have risen 53.7 per cent.

The resilience of carry trades is all the stranger as the US dollar is strengthening, near a six-month high against a trade-weighted index. Australia’s dollar, a big carry-trade destination, is also instructive. It has dropped 7 per cent against the US dollar in three weeks, as its central bank signals rates might come down from their current 7.25 per cent.

Increasingly, the emerging market carry trade looks like one of the last unburst bubbles.

john.authers@ft.com

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