FxWirePro: USD/MXN ITM calls as Mexican peso attempts

MXN extended decline yesterday, drifting back to early March low, but attempting to recover today following recent 3.5% post-Fed decline.

The Banxico (the Central Bank of Mexico) kept its benchmark interest rate at a 10-year high of 8.25 percent on 28th March 2019, as widely anticipated. Policymakers emphasized that the global growth prospects have deteriorated and that domestic prices declined recently, favored by non-core transitory factors.

The MXN is somewhat firmer on pro-risk sentiment but developing market tensions remain evident elsewhere, with the TRY falling 1.5% on the day. The US 10YY has risen modestly to 2.40% while the 3M/10Y curve is back to flat. There is a full suite of US data releases this morning – Personal Income/Spending, PCE data, the Chicago PMI, New Home Sales (and final U. Michigan Sentiment data).

OTC FX updates: Please be noted that the 3m skews signal upside risks of this pair, hedgers’ bids up to OTM strikes up to 20.400 levels.

With the above in mind, we take the opportunity to analyze what generally works on the MXN vol surface, on a back-tested basis, and from a pure vol standpoint. The above nutshell explains a variety of structures for 3M maturities. 

For instance, selling RRs (delta-hedged) works orders of magnitude better than selling ATM vol. Better yet, 1*1.5 ratio USDMXN call spreads (delta-hedged) have been notably a high Sharpe Ratio (1.66) trade to hold over the years. Being long ATM vs. short OTM calls at near vega neutral notionals, the 1*1.5 ratio call spread structure is also well positioned to be selling topside OTM vols, which now are priced heftily after the latest vol explosion. 

The peso sell-off triggered a vol surface dislocation, pushing gamma vols to 15.3 handles, the highest since June, and an even quicker reaction of front-end skews, reaching the highest since the 2016 US Presidential elections. The back of the vol curve is lagging the move, with 12M / 3M 25D risk reversals vol ratio at a multi-month low. Courtesy: Sentrix & JPM

Currency Strength Index: FxWirePro's hourly USD spot index is flashing at 59 (which is bullish) while articulating at (14:17 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex