Mexican inflation likely to remain in line with Banxico’s target

The one major category that has seen modest inflation acceleration over the past three months is health and personal care, while food inflation also ticked up in April.

We project that core inflation bottomed out in April eliminating some of the downside risk to the prices. It's difficult to factor in a significant rise in core prices going forward given the low wage pressure and substantial output gap while MXN pass-through remains low.

Essentially, headline inflation remains close to Banxico's target level of 3.0% post the sharp decline in January due to the elimination of long-distance telephone charges (which reduced housing inflation substantially and kept core inflation below 2.5%) and lower transport inflation.

As a result, we do not see anything seriously disturbing the status quo and expect inflation to rise only modestly to 3.17% yoy through mid-May following the seasonal decline in prices by -0.30 mom. Growth in aggregate demand will remain the key driver for both inflation expectations and monetary policy in the medium term.

Call ratio Spread on USDMXN

We recommend call ratio spread as the pair is likely to remain either sideways or slightly bullish in our view.

Buying call spread in addition to selling more necked call options constitutes this hedging position.

The portion should ideally be in the ratio of 1:2 or 1:3.

CRS= Buy 1 ITM call + sell 2 OTM call.

Short time for expiry is preferred.

Max returns = Exercise Price of Short Call - Exercise Price of Long Call + Net Premium Received - Commissions Paid.

Max Profit Achieved When Price of Underlying = Exercise Price of Short Calls.

Breakeven will be at:  short strike price + difference in strike price + net credit.