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We run you through JP Morgan’s analytical attempts in this write-up where neutral approach for LatAm FX bloc and strategic country views are focused. The improvement in global growth sentiment – after some positive economic activity data in the US and an uptick in Chinese PMI could, in turn, create some mild market optimism for Latam currencies.
In particular, upside growth revisions from China could benefit LatAm countries greatly, and as such we take profit on our long USDCLP position (PnL +1.4%). That said, we suspect LatAm FX capital gains could be more limited, particularly since the positive impact of a repricing of a more dovish Fed seems to have faded, and continued Euro area weakness could prevent EUR strength (which has been correlated with EMFX strength).
Therefore, stay neutral LatAm FX position in our GBI-EM portfolio (via OW BRL and COP and UW UYU) and long MXN puts with KO = 18.5. We also initiate a short EURCOP position, targeting 3425, and take profit on our long USDCLP position (PnL +1.4%).
MXN: Expect limited capital gains and a poor risk-reward skew. MXN continues to trade on the rich-side relative to our BEER FV models, and underprices some local risks, in our view. Namely, MXN failed to weaken once risks rose of closing the Mexico-US border over migration (which the Trump administration yesterday pivoted away from, and to car tariffs instead) as well as when the Mexican government suggested more Pemex aid would be under way, thus jeopardizing even more its fiscal balance target for the year. Understandably, the market may have become more hesitant to price in tariff threats over the past 3 years, whereas the fiscal concerns have been well flagged since December. The 2020 preliminary economic agenda for example reinforced the idea that the administration would commit to cutting spending to reach its target, though questions remain about the feasibility of such a plan.
Nevertheless, in our view, MXN’s lack of volatility is a testament to the fact that long positions are already well- ingrained: CFTC positions, for example, illustrate that long MXN positions via IMM contracts are near six-year highs, whereas short positions dropped near one-year lows. Even local pension funds have lowered their international holdings as of February.
As volatility remains low, market participants may not find short MXN outright positions attractive, and we also have maintained our preference for option structures. But this dynamic, in our view, limits MXN capital gains, and skews its risk-reward in its disfavor. Courtesy: JPM
Currency Strength Index: FxWirePro's hourly USD spot index was at 17 (mildly bullish) while articulating (at 13:26 GMT).
For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex
