NEW YORK (Reuters) - Mexico’s peso has improbably been the world’s top-performing currency since Donald Trump’s presidential inauguration, and an increasing number of emerging market fund managers said it could rebound further from its nosedive following the U.S. election.

A board displaying exchange rates is seen at a foreign exchange house in Mexico City, Mexico, February 3, 2017. REUTERS/Edgard Garrido

Even before its inauguration comeback, a number of emerging market fund managers were betting that the peso had seen its worst days and was poised to outperform in 2017 along with other Mexican assets.

“We’ve gone from an outright short late last year to an overweight position relative to the index, just because there’s a lot of bad news priced in,” said Jim Barrineau, Schroders’ head of emerging markets debt and portfolio manager for its multi-sector bond fund.

“The real exchange rate is very, very cheap relative to history, and at this point, the bond yields are competitive with the higher yielding countries in EM.”

The peso was up 8 percent since Trump’s inauguration on Jan. 20 despite his proposal last week of a 20 percent border tax on Mexican imports and the collapse of a scheduled face-to-face meeting with Mexican President Enrique Pena Nieto.

The peso also made a technical breakout Friday, rallying through a resistance point at the 20.56 level, around where it closed on Thursday. That level marks a 38.2 percent Fibonacci retracement of its sell-off since the Nov. 8 election.

“Perceiving the 20 percent import tax comment as a starting point for negotiations, the market took some solace because it could have been much higher, say 30 percent or 35 percent,” said Gordian Kemen, global head of emerging market fixed income strategy for Morgan Stanley.

The peso has continued its tear even as Trump has reiterated concerns about the North American Free Trade Agreement, saying on Thursday he would like to speed up talks to either renegotiate or replace the deal.

Kemen said investors were relieved Trump did not move to unilaterally withdraw from NAFTA or rule out talks entirely.

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And though investors have in the past wagered at their peril that Trump’s often extreme rhetoric would not be matched by his real-world actions, many are betting that the current price of Mexico’s peso already reflects the worst of any potential U.S. action against the country.

Deutsche Bank asset managers said earlier this week they believed the peso had hit a near-term bottom.

Similarly, Michael Gomez, PIMCO’s head of emerging markets portfolio management, said that while he expects the background to remain noisy, “Mexican assets and the peso specifically already incorporate much of the expected downside risk.”

UBS strategists recently said in a research note that even the border tax had been 70 percent priced into the peso’s value.

That’s not to say big risks do not remain, especially given the recent bounce.

“The peso is cheap certainly and absent a big unfavorable change to NAFTA, you will make great money investing in Mexican bonds. But a change to NAFTA that’s unfavorable, and who knows,” said Kieran Curtis, investment director at Standard Life Investments in London, adding that he still sees Mexico as a “deteriorating credit.”

Each firm calculates a currency’s “fair value” differently, but generally valuations are derived by comparing the ability to buy the same goods in different countries or measuring the value of income and investment an economy takes in against what it spends.

Fund managers interviewed by Reuters largely agreed that the peso was at a level inconsistent with the reality of its economy, but some remained wary of further Trump-related surprises.

While he holds slightly overweight positions in Mexican debt, including local currency bonds, Gorky Urquieta, co-head of emerging market debt at Neuberger Berman, said aggressive unilateral U.S. imposition of tariffs or an unwind of NAFTA would likely hit the peso again.

“As much as we think the currency is undervalued, it could become even more undervalued before it begins a sustained recovery,” he said.