Mexican Peso: Carry flows outpace fundamentals – BNY

BNY’s Geoff Yu highlights that Mexican Peso (MXN) carry demand is surging ahead of Banxico’s decision, with MXN the best-bought currency on a weekly basis. However, weak volumes, deteriorating equity flows and only modest sovereign bond demand temper the story. Yu stresses that Banxico easing, softer real rates and US trade uncertainty limit MXN’s scope for sustained outperformance.

Carry strength versus weak conviction

"MXN is heading into the Banxico decision with flow momentum running well ahead of the underlying asset story. Forward and swap demand has surged twice in the last two months, leaving MXN the best-bought currency on a weekly basis and fifth-best over the past month. Spot demand has also been firm, but the broader picture is less convincing: volumes remain weak outside the surge sessions, equity flows are deteriorating, sovereign bond demand is only modestly positive and there is no clear energy or terms-of-trade premium."

"A softer Fed backdrop is helping carry, but Banxico easing, weaker real rate support and persistent U.S. trade uncertainty limit the case for further outperformance."

"The most revealing element is the gap between recent buying and underlying holdings. MXN flows are exceptionally strong within carry names, yet positioning is only moderately positive once the transaction-driven spikes are smoothed. The more sustainable holdings level appears to be more like 0.2x the rolling 12-month average, well below holdings spikes driven by one-off surges."

"This suggests that the buying has not yet translated into durable conviction and could unwind, as it did after the June episode."

"Our preferred stance is therefore cautious: to avoid chasing MXN, use further strength to reduce exposure or add protection, and favor Latin American carry markets with stronger asset flow sponsorship."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)