FxWirePro: Capitalize on lower MXN risk reversals and implied vols to optimize trading structures

During February trading sessions, Mexican currency (MXN) has traded more resiliently than anticipated, while implied vols have remained close to 2019 lows with positively skewed IVs of 2m tenors are indicating upside risks of USDMXN (refer 1st nutshell). Yet MXN seems to trade rich to fundamentals according to our BEER valuation framework (refer 1st chart) and additional negatives in recent weeks suggests it may be under-pricing some risks. 

CFTC positioning data for IMM contracts remains lagged due to the Government shutdown, but show that positions have increased in January. 

Specifically, this seems to have happened on the back of real-money investors, rather than hedge funds, according to the same CFTC data (refer 2nd chart), which we hypothesize is due to MXN’s high real rates profile. 

In conclusion, we reckon circumstances are such that Mexican peso is more likely to sell off than rally in the near term. 

For now, more chances of a selloff than a rally and we continue to prefer positioning via MXN puts rather than in cash to limit the negative carry, and utilize low-risk reversals and implied vols to potentially cheapen trading structures. Courtesy: Sentrix & JPM 

Currency Strength Index: FxWirePro's hourly USD spot index is inching towards -78 levels (which is bearish), while articulating (at 13:01 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex