FxWirePro: Latin American exotic USD/MXN hedging perspectives; Binary puts for speculation but call spreads for hedging

Mexico inflation remains subdued, and recently, it has surprised the markets on the downside, reducing market expectations for the year-end print. In particular, CPI increased 0.09% 2w/2w in the first half of July as a result of incremental rises in fruit and vegetable prices, partially offset by a reduction in egg prices and a weak core print.

Core inflation was 0.10% 2w/2w (consensus: 0.16%), due to higher-than-expected reductions in core other goods prices (-0.19% 2w/2w). After this report, annual inflation decreased to 2.8%, from 2.9% in the last fortnight of June, consolidating a downward trend.

Technical glance and hedging perspectives:

Intraday charts were popping up with bearish signals as downward convergence is seen on RSI curve, while %D line crossover near 75 levels on stochastic curve.

We think that Mexican peso may take a pause for sometime from its underperformance against the USD but on longer term the pair will continue to consolidate above the 16.50 for the next few weeks.

Speculators can buy At-The-Money binary puts for target at 15-20 pips as the intraday trend is bearish with converging signals from leading indicators.

But on hedging front the recommendation would be bullish bias. Add 1M longs on An-The-Money calls which are available at delta 0.50 + Write another Out-Of-The-Money call with positive theta value and 0.5% higher strike price with the same maturity for a net premium payable. The combined position should have delta value as shown in the diagram. Theta is almost 0 which is still acceptable as we formulated position in 1:1 proportion.