FxWirePro: Mexican peso gains but with pinch of salt – Options structure to optimize USD/MXN hedging on new trade deal to replace NAFTA

The “world’s greatest deal maker” has struck again. NAFTA seems to be totally dead, long live the new trade agreement between the US and Mexico (for now), the basic principles of which were announced yesterday. The US and Mexico announced that they had reached a new trade deal, which will increase the regional content for the car industry, with 40-45% of auto workers earning at least $16 an hour. The agreement is to replace NAFTA (North American Free Trade Agreement). The deal is still to be ratified and it remains to be seen whether Canada will join the pact. 

The details that emerged constitute a regression against the NAFTA agreement and further erode the global trade order. 

Thus, what are we to make of the bilateral deal between Mexico and the US? The reaction on the market was muted. MXN did initially appreciate slightly, but was unable to defend the gains for a long time. The uncertainty seems to be too high. The main question is whether a deal with Canada will also be reached in the end. Not all is cut and dried, yet. 

Also, there is still a risk that the US will perform an about-turn. Despite the uncertainty, initially an agreement has to be seen in a positive light for the peso. The likelihood that the Mexicans will end up without a deal has fallen. 

The fact that the Mexicans were unlikely to emerge as the winners from a revised deal is likely to have been clear to most anyway. Probably it would be more advantageous for the Mexicans if NAFTA in its current form was to be maintained, but no deal would have been even worse. 

The current agreement has to be seen as something in between. Over the next few days further details on the bilateral agreement are likely to emerge. If everything continues to move in the right direction, the peso is likely to continue its appreciation against the USD towards 18.50 over the coming weeks. Courtesy: Commerzbank

Trade tips:

In our previous post, we recommended buying a 1m 1x1 USDMXN call spread and we now like to roll over this strategy (spot ref: 18.7425 strikes: 18.4010, 19.3850) vs selling the 25-delta put (strike: 19.3850). Courtesy: Commerzbank

Currency Strength Index: FxWirePro's hourly USD spot index is flashing at -138 levels (which is bearish) while articulating (at 14:01 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex