USD/MXN: Mexican peso open to a squeeze - TDS

Sacha Tihanyi, Deputy Head of Emerging Markets Strategy at TDS, explains that the Mexican peso has been a top performer supported by carry and a compression in volatility across Emerging Markert, and warns positioning now appears to be skewed long MXN at record levels, which leaves the peso open to a squeeze from not only Mexico-specific factors, but global macro factors.

Key Quotes: 

“MXN (and many Latam currencies, save for BRL) has been a top market favourite since the start of the year. If measured back to the start of December, when the market began to rapidly price out any Fed hikes for 2019, MXN is by far the best performing currency globally (EM or otherwise). Unsurprisingly the move in spot also coincided with the beginning of a substantial move into MXN longs amongst the investment community, if we take the CFTC non-commercial positioning data as a general proxy for investor behaviour. The general market features of high yield and collapsing volatility, along with a failure to see Mexican portfolio inflows maintain the substantial inflows of January, suggest that MXN buying has likely not been driven by Mexico-specific fundamental factors, but by the broad and substantial move into EM in January, on the back of financial factors.”

“Net-long speculative MXN positioning has hit its highest level since the Taper Tantrum, thanks to a collapse in gross shorts (that were only beginning to become more bold, until USDMXN collapsed towards 19.00 this week and washed them out). However, the main driver since the December rally has been the explosion in long positioning, with gross longs now standing at their highest level on record.”

“With positioning becoming so highly skewed, in the face of deteriorating fundamentals in Mexico and still well established political risk / fiscal regime uncertainty, MXN relies purely on a continuation in compressing vol and high carry. We expect the latter to be maintained for the duration of this year, but (in our view) it is not enough to offset any (currently unpredictable) politically-sourced shock, or sufficient to insulate the peso from its most skewed long positioning on record.”

“Furthermore, and this is the crucial point, should we not continue to see compression in EM vol, and divergence between broad USD direction and EM FX vol direction, MXN becomes increasingly subject (and sensitive) to external non-Mexico specific shocks. Thus less of a vol spike will be required to wreak havoc with long MXN positions.”
 

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility.

Feed news

Latest Forex News

Editors’ Picks

EUR/USD steady around 1.1240 in ultra-thin holiday's trading

The EUR/USD pair bounced some 20 pips from its weekly low during the Asian session, now mute around 1.1240 with most market's off today. Softer-than-expected US housing data passed unnoticed.

EUR/USD News

GBP/USD battling around 1.3000

The GBP/USD pair is heading nowhere fast after bottoming for the week at 1.2978, amid lack of progress in Brexit negotiations.  Encouraging UK data failed to trigger Pound's demand.

GBP/USD News

USD/JPY: On track to close in the middle of its 50-pip weekly range below 112

The USD/JPY pair remains frozen below the 112 handle in the NA session and there is no reason for it to make a meaningful move as investors are already enjoying the Easter holiday.

USD/JPY News

The Tale of the Prosperous Consumer-US Retail Sales

American consumers asserted the right to spend in a grand fashion in March boosting retail sales to the fastest expansion in 18 months as the booming job market put the shutdown marked holiday season to rest.

Read more

Gold Forecast: Eyes 8-month rising trendline after weakest weekly close since December

The troy ounce of the precious metal lost around $17 this week and now looks to record its lowest weekly close since the end of December near $1275.

Gold News

majors

Cryptocurrencies

Signatures


  •  
  •  
  •  
  •  
  •