According to MUFG’s Derek Halpenny, increased volatility in the rates market is driving a broad unwind of emerging market foreign exchange (EM FX) carry trades, with Latin American currencies, particularly the Mexican Peso (MXN), coming under significant pressure [1]. Since the middle of September, the USD/MXN exchange rate has surged by 8%, making the Mexican Peso the worst performing Latin American currency since the start of September [1]. The latest IMM positioning data indicates that leveraged funds’ long positions in MXN are at their highest level since the beginning of 2023, which has contributed to the squeeze as implied volatility jumps [1].
Halpenny notes that the risk aversion fueling this move could persist, suggesting that the liquidation of carry positions in EM FX may have further to run [1]. In the G10 currency space, the Swiss franc and the yen were the top performers yesterday, and these trends could potentially extend further according to Halpenny [1].
The market implications are significant, as the sharp move in USD/MXN and the unwinding of leveraged positions highlight the vulnerability of LatAm currencies to global volatility shocks [1]. The commentary suggests that investors should remain cautious, as the current environment of heightened volatility and risk aversion may continue to impact EM FX markets [1].
CONCLUSION
The Mexican Peso has experienced a sharp decline due to the unwinding of carry trades amid rising rates volatility, with leveraged positions being squeezed and implied volatility spiking. Market participants should be alert to further potential downside in LatAm currencies as risk aversion persists.