USD/MXN may be due for a rebound - Nomura

Analysts at Nomura suggest that in LatAm, they think that USD/MXN call spreads provide investors with a reasonable opportunity to capture the next move in MXN as markets have been pricing-out possible tail risk scenarios for MXN, FX hedges have come off, and there is more optimism on the NAFTA negotiations.

Key Quotes

“We believe USD/MXN may be due for a rebound as factors contributing to MXN strength in Q1 2017 appear to be losing steam:

1. Because of the extent of the correction in USD/MXN, we now see risks tilted towards a reversal when the US and Mexico finally begin formal NAFTA negotiations. Importantly, Mexican officials have been communicating a less tolerant stance towards the US implementing trade frictions. On this front, walking out on the NAFTA talks seems to be an option that cannot be completely ruled out on Mexico’s side.

2. There are numerous potential external risk events that could have knock-on effects in the next few months, including a UK election and new rhetoric on the Fed’s balance sheet reinvestment policy.

3. 4 June will see the election in the State of Mexico. Given the size and historical importance of this state for the PRI, it could be perceived as a harbinger of the 2018 presidential election.”

“Domestic political repercussions: The experience in the 2006 and 2012 presidential elections may become more relevant if AMLO and his party are viewed in polls to be better positioned. Alliances with other parties may add momentum to this, as markets could price in a higher probability to his candidacy.”