MXN is the clear underperformer for another session. The trading team has remained long the pair via topside options they put on a while ago and remain biased buyers of USDs on clips. There are a couple of factors trading highlighted fueling this MXN underperformance:
• AMLO's judicial reform has already cleared the first hurdle in Congress, where opponents continue to remark this will put democracy at risk. Alongside the well watched judicial reform saga, there are more articles getting published like 's "Its Time to Short AMLO's Mexico."
• Positioning setup was poor for this kind of additional risk-off move. In the first round of the MXN selloff; a lot of Real Money-type accounts had been long MXN from good levels, so these players could stomach the move. Following the BoJ hike/VAR blowup saga, a lot of macro accounts got sucked back into MXN longs (carry recovered and Gov. Uchida suggested the BoJ may pause the hikes if financial conditions are volatile). They are now in from bad levels and underwater with this type of rally in the pair.
• Broadly, US cut pricing at over 100bps by yearend seems to be stretched, and any improved data/sentiment from the US should see further USD support.
The next area of resistance should come in from 19.90-20.00 with 20.20 area as the flash high region from the beginning of August.
-UBS Strategy
Comments