FxWirePro: USD/MXN bullish/bearish scenarios and hedging perspectives

Market participants remain upbeat on AMLO’s policies while a successful USMCA negotiation removed a large tail risk for MXN. An attentive Banxico to rising inflation in the near-term also supports MXN staying near 19.0 for the rest of the year. Challenges remain this year, as uncertainty may still rise ahead of AMLO's new administration in December. Still we suspect market optimism could continue, particularly as the biggest risk from the NAFTA revision – the wages of auto workers – will only take effect in 2023 and Banxico looks to remain vigil regarding FX pass-through to inflation. 

Bullish scenarios: Foresee USDMXN at 20.0 if AMLO’s policies seem to put the country’s fiscal balance on an unsustainable path. 

Bearish scenarios: USDMXN at 18.0 if uncertainty lowers regarding AMLO’s policy mix and EM capital inflows resume.

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: 18.8196 strikes: 18.4331, 19.3475) vs selling the 25-delta put (strike: 19.3475). 

Currency Strength Index: FxWirePro's hourly USD spot index is flashing at 7 levels (which is neutral) while articulating (at 14:03 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex