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RBA Raises Interest Rates by 25 Basis Points as Inflation Pressures Persist 
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The peso has outperformed in the recent past as EMFX rallied across the board. Several factors contributed to this outperformance: Mexico’s high real rates relative to peers, appealing short and medium-term valuations and the significant room to increase MXN exposure given the very low level of investor positioning relative to history.
In addition, the central bank’s concern around financial stability risks means that while rate cuts will likely continue, Banxico seems more keen than peers to keep a real yield buffer in place. This should matter to investors given the importance of relative EM real yields during this COVID-19 crisis. In summary, we think the outperformance of the peso should continue, albeit a more moderate pace than this past week.
OTC Updates and Trading Strategies:
As stated in our previous posts, the positively skewed IVs of USDMXN of 3m tenors have delivered as expected and have still been indicating upside risks, while IV remains on lower side and it is perceived to be conducive for options writers.
Considering the current MXN skew setup and the receding risks for MXN spot we are open to taking the gamma risk in order to more efficiently reap the extra OTM vs ATM premium on MXN put side. 1*1.5 MXN ratio put vol spreads have shown strong and almost equivalent systematic returns for USDMXN and EURMXN over last few years.
3M USDMXN ATM/25D 1*1.5 vol ratio call spread vs 22.80/25.77 indicative (spot reference: 21.731 levels).
On the other hand, activated shorts in EUR vs MXN in cash at 25.08. Marked at 2.04%. Stop 26.0. Courtesy: Sentry & JPM
