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Positioning Dynamics Prompt Substantial MXN Slump Overnight

MEXICO
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  • Overnight geopolitical concerns prompted sharp moves in currency markets, with MXN the significant underperformer. Crowded positioning saw the flight to safety exacerbated and the Peso briefly registered losses of over 6% against both the greenback and the Japanese yen.
  • Over the past few weeks, CFTC data has indicated positioning has become increasingly bullish MXN as its ongoing resilience appeared underpinned by attractive carry and low levels of implied vols.
  • These dynamics have left the peso vulnerable to the shift in sentiment and the overnight price action displayed the substantial positioning squeeze in full effect. “As they say, carry and short volatility is like picking up nickels in front of a steamroller — that steamroller just started accelerating”, an analyst from Vanda research noted.
  • Price action has subsequently stabilised, however, USDMXN remains 1.85% higher on the session. As we noted earlier, a number of resistance levels were pierced, and the pair remains close to 17.3860, the Jan 17 high. This level is an important reversal trigger and a break, if seen, would be a bullish technical development.
  • We also noted on Thursday that Macquarie would short any new spike in volatility ahead, to bet on declines in USDMXN implied vol as EM central banks, including Banxico, have begun to defend their currencies through verbal rhetoric.

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  • Overnight geopolitical concerns prompted sharp moves in currency markets, with MXN the significant underperformer. Crowded positioning saw the flight to safety exacerbated and the Peso briefly registered losses of over 6% against both the greenback and the Japanese yen.
  • Over the past few weeks, CFTC data has indicated positioning has become increasingly bullish MXN as its ongoing resilience appeared underpinned by attractive carry and low levels of implied vols.
  • These dynamics have left the peso vulnerable to the shift in sentiment and the overnight price action displayed the substantial positioning squeeze in full effect. “As they say, carry and short volatility is like picking up nickels in front of a steamroller — that steamroller just started accelerating”, an analyst from Vanda research noted.
  • Price action has subsequently stabilised, however, USDMXN remains 1.85% higher on the session. As we noted earlier, a number of resistance levels were pierced, and the pair remains close to 17.3860, the Jan 17 high. This level is an important reversal trigger and a break, if seen, would be a bullish technical development.
  • We also noted on Thursday that Macquarie would short any new spike in volatility ahead, to bet on declines in USDMXN implied vol as EM central banks, including Banxico, have begun to defend their currencies through verbal rhetoric.