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Goldman Sachs On MXN: Keep Earning Carry, But Tighten Stops

MEXICO
  • LatAm FX has led EMFX resilience, with BRL, CLP, COP, and even the lower-volatility PEN appreciating significantly versus the Dollar.
  • MXN has been a lower octane participant in this trend: on one hand, MXN has appreciated moderately versus the Dollar YTD, and has benefited from vigilant monetary policy in Mexico and an associated rebuild of carry that has been in-step with its LatAm FX peers. However, back in December GS new measures of LatAm FX risk premia showed that MXN appeared to have less idiosyncratic underperformance to price out in 2022, which has probably contributed to the more moderate performance of MXN compared to regional peers YTD.
  • MXN still features less risk premium than other currencies in LatAm, even though risk premia elsewhere, such as in Peru, has declined after this year’s striking gains. The corollary of this lack of risk premium, however, is that while BRL, CLP and COP are likely to be driven, to a large extent, by domestic headlines in the months ahead, MXN may be driven by more global, and EM FX-wide forces, which means that MXN carry can still be harvested by a carefully-chosen short that helps to keep FX carry high, but to net out global risks.
  • A prior GS trade recommendation to be short AUD/MXN, has accumulated potential total returns of just under 5% since Oct, about half of which is attributable to carry. As long as FX investors continue to lean into EM FX carry as a theme, MXN longs—paired with the proper funding currency—can continue to perform.
  • However, risks remain: globally, a further hawkish turn in DM monetary policy that sours enthusiasm for EM FX would be a key risk for the Peso, as well as medium-term growth concerns. So, while GS remain positive on MXN in the current market environment, they have tightened stops on trade recommendations to protect gains.
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