Despite we revise down USD/MXN slightly to 18.9 from 19.2 by year-end, the major uptrend of USDMXN seems still intact as the peso to underperform in the long run. Banxico hiked 50bp to 4.25%, in line with J.P. Morgan expectations but surprising markets to the upside— markets priced-in roughly 30bp. This suggests some modest upside for MXN, but there are myriad factors that keep us cautious. 

Indeed, we do not see some of the factors driving Banxico’s rate hike actually turning around. In particular, Banxico expressed concern about the trend in the current account deficit. Our economists read this as reflecting broader BoP concerns (i.e. also on the capital account).

We think that a 50bp will do little to slow domestic demand and hence will lead to import compression. A weaker currency would likely be a better adjustment mechanism.

OTC Outlook & Hedging Framework:

ATM IVs of 1W expiries are at 15.60%, and 15.28% for 1M tenor.

Although the momentum in long term bull trend is reduced we think it is monetary, from the last couple of weeks MXN regained the strength or holding stronger, so any minor corrections in an uptrend are justifiable but shouldn’t be deemed as the dollar has been depreciating.

But if you have to evaluate the ATM IVs with the monthly technical chart, this month’s bullish swings may likely gain momentum in rallies in the days to come.

If you have sensitivity table, Vega on OTM call strikes are also flashing healthy numbers with supportive IVs, Vega stands for the sensitivity of an option’s value to a change in volatility. It is usually expressed as the change in premium value per 1% change in implied volatility.

Hence, we recommend initiating longs in 1M ATM +0.51 delta call, 1 lot of (1%) OTM +0.36 delta call and simultaneously short 1 lot of deep ITM call (0.5%) with comparatively shorter expiry in the ratio of 2:1.