MUFG analysts Derek Halpenny and Abdul-Ahad Lockhart report that the Mexican Peso continues to benefit from strong carry demand and low FX volatility, with USD/MXN breaking below the 17.00 level for the first time since June 2024 [1]. The analysts attribute this performance to robust Mexican economic growth, persistent inflation, and the Bank of Mexico's (Banxico) steady policy stance, which together support the attractiveness of carry trades in the peso [1].
The policy rate in Mexico is currently at 6.50%, which MUFG notes provides reassurance to investors that carry in Mexico will remain appealing [1]. Additionally, one-month implied volatility for USD/MXN is close to the low recorded toward the end of last year, itself the lowest since 2019, further supporting the currency's stability and attractiveness for carry strategies [1].
However, MUFG cautions that the trade has become crowded, increasing the risk of a sharp reversal if external factors change, such as a potential rate hike by the Federal Reserve or a repricing of the US yield curve for more hikes [1]. The analysts also mention that the current USD/MXN levels are well below their previous forecasts, indicating a need to adjust their outlook lower [1].
CONCLUSION
The Mexican Peso's strong performance is underpinned by attractive carry trade dynamics and low volatility, but MUFG warns that crowded positioning could make the currency vulnerable to sharp reversals if global conditions shift. Investors are advised to remain cautious despite the current favorable environment.