Mexican Peso: Carry appeal faces crowding risk – MUFG

MUFG analysts Derek Halpenny and Abdul-Ahad Lockhart state that the Mexican Peso continues to benefit from low FX volatility and strong carry demand, with USD/MXN breaking below 17.00 for the first time since June 2024. They note that robust Mexican growth, sticky inflation and Banxico’s steady policy stance support carry, but warn that positioning is crowded and vulnerable to a sharp reversal.

Peso supported by attractive carry and low volatility

"The Mexican peso performance highlights the continued attractiveness in carry trading strategies in FX with USD/MXN breaking below the 17.00-level this month for the first time since June 2024."

"We have now reached levels well below what we expected at this stage and will likely have to adjust our USD/MXN forecast profile lower."

"With the policy rate at 6.50% that provides reassurances for investors that carry in Mexico will remain attractive."

"Low vol has persisted and USD/MXN 1mth implied volatility is close to the low recorded toward the end of last year, which was the lowest since 2019."

"As always with a trade that has performed so well, one risk is that the trade is now crowded and hence a sharp reversal is possible, if say for example the Fed hike rates and the US curve reprices for more hikes."