According to BNY's Geoff Yu, the Mexican Peso (MXN) is experiencing a surge in carry demand, making it the best-bought currency on a weekly basis and the fifth-best over the past month as it heads into the upcoming Banxico decision [1]. This surge is reflected in forward and swap demand, which has doubled in the last two months, and spot demand has also remained firm [1]. However, Yu notes that the broader picture is less convincing: trading volumes are weak outside of the surge sessions, equity flows are deteriorating, and sovereign bond demand is only modestly positive, with no clear energy or terms-of-trade premium supporting the currency [1].
Yu highlights that while a softer Federal Reserve backdrop is aiding carry trades, factors such as anticipated Banxico easing, weaker real rate support, and ongoing U.S. trade uncertainty are limiting the potential for sustained MXN outperformance [1]. He points out a significant gap between recent buying activity and underlying holdings, with sustainable holdings estimated at just 0.2 times the rolling 12-month average—well below the peaks seen during one-off surges [1]. This suggests that the current buying has not yet translated into durable conviction and could unwind, as observed after the June episode [1].
Given these dynamics, BNY's preferred stance is cautious: they recommend avoiding chasing further MXN strength, using any additional gains to reduce exposure or add protection, and favoring other Latin American carry markets with stronger asset flow sponsorship [1].
CONCLUSION
The Mexican Peso is benefiting from strong carry flows ahead of the Banxico decision, but weak underlying support and external uncertainties limit the case for sustained outperformance. BNY advises a cautious approach, suggesting investors reduce exposure on further strength and consider alternative Latin American markets with more robust asset flows.