The Mexican Peso

Bonds look well bid, the narrative has been swinging from Fed hawkish to Fed dovish, the US is settling back into its potential growth rate (fiscal stimulus is rolling off, and no sign of the supply-side afterburners), and the trend in the 5yr real yield has clearly broken lower.

Against this backdrop, EM currencies should do well. The Mexican peso got out ahead by rallying hard in December, making it tough to jump on here for those who haven’t been involved. But things could be lining up for a big move, if we can get this narrative to persist and a couple/few chart patterns break our way.

Correlated assets can be great leading indicators. In the case of the Mexican peso, there are 3 Mexico-specific assets I look at–beyond, of course, the peso itself.

Here’s USDMXN itself:

This is the five year chart. Betting on a continued move after the December move is tricky, because there are no natural near-by stops above. However, it’s clear that if this structure does break down (say, thru 19.00), there’d be some serious scope for some open field running below.

I also look at the yield on the five year TIIE swap. Here it is, zoomed into the one year chart:

As you can see, and as EM hands know, it correlates strongly to the bigger impulses in the peso itself–even if the relative volatilities are very different. You can also see it looks to be breaking down already.

I also look at the five year CDS on Pemex, the state oil producer. Here that is on a one year chart:

This one has yet to break but is on the verge. It too tends to correlate strongly with general Mexico risk.

Lastly, I look at spread between the yield on the US 10 year and the 10 year Mexican TIIE swap. It too is on the verge.

I watch all four of these, and when one or two break it is usually a sign that the others will follow–as long as the broader narrative remains intact.

The way I am playing this for the Trading style is by putting on a half position now, and adding the rest once I feel “it’s on”. As always, sizing and setting stops is key. Good luck.