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HSBC Go Long BRL/MXN 2 Month NDF

LATAM FX
  • HSBC have entered a long BRL-MXN 2m NDF on the back of the Mexican peso’s valuation being stretched and strong external accounts expected to support the Brazilian real. They enter the trade at 3.3783 with a stop loss at 3.2975 and a take profit of 3.52.
  • HSBC think it will be hard for the MXN to sustain recent strength, citing upcoming elections in both Mexico & the US, imminent easing from central bank and signs of slowing domestic activity. However, HSBC do concede that they do not expect a sharp sustained MXN depreciation as their base case, but when considering the above risks alongside MXN's rich valuation, HSBC think downside risks are greater than upside risks at this level.
  • MXN is trading at over 22% stronger than its 10-year average real exchange rate at the end of 2023 (BIS) and the bank sees USD-MXN at 17.75 by end Q2.
  • Meanwhile, Brazil continues to stand out positively in an EM context on the macro and political fronts, despite recent policy noise. Specifically, growth and export volumes are developing favourably.
  • Furthermore, HSBC believe the near-term fiscal risks are less worrying than previously expected thanks to stronger revenues (largely one-off) in January and February coupled with the government's ability to delay spending, which reduces the risk of an imminent change in fiscal target.
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