Mexico plants optimism in its strengthening economy

IP growth sluggish in Q1 on passive US demand: We project further modest growth in March at 1.7% YoY to complete Q1 growth at 1.4% YoY versus growth of 2.0% in Q3 and 2.4% in Q4. The manufacturing sector led the slowdown with expected growth of 3.2% YoY in Q1 (4.2% YoY in March) as against 4.6% in Q4. In general, the weakness in the manufacturing and overall IP was primarily driven by low demand from the US and reflected in recent trade data. Industrial production growth over the first two months this year was weaker than the trend in second half of 2014.

Balance of trade: Mexico recorded a trade surplus of 479.80 USD Million in March of 2015. The IP improvement since last year has largely been driven by strengthening US growth and a jump in vehicle exports. Mexico's real export growth has surged impressively recently. The improvement in the competitiveness of exports and therefore stronger investment growth is expected.

We project the manufacturing and trade gains to boost the rest of the economy through the investment, employment, wage and sentiment channels. The Mexican economy will likely grow by 2.7% in 2015 and 3.2% in 2016.

Technical and Derivatives Insights:

On weekly charts of USDMXN we see some sort of sluggish momentum on either side. As a result the pair seems to have trading sessions on sideways to downside. We attempt to correlate the positive fundamental news that is expected to flow in with the currency markets. Other than that there is nothing much cooking on this chart.

As we are slightly neutral to bearish on this pair owe to the expected positive news from Mexico, we recommend building positions with Put Ratio Spreads.

How to construct the strategy: It is an option combination of Bear Put Spread and naked puts. Buying a Put and sell more Puts at a lower strike price in ratio of 1:2 or 1:3 executes this strategy.

A short time for expiration is preferred to take advantage of time decay in short positions and not to give stock time to move lower. Cost of hedging would be the least comparatively with naked puts or any other options strategies as premium received from more number of shorting finances the premium to buy a put option. However, Margin is required to take short Put positions.