Looking to the Futures

The Mexican peso has been the best performing major currency this year along with the highest real effective exchange rate – a measure of a nation’s competitiveness – according to Bloomberg. According to Deutsche Bank, that rate for Mexico is the highest is has been since 2005. Back then the peso was trading for around 9-10 cents USD, nearly twice as strong as now. 2023 marked its best performance against the US dollar in decades. 

The secret to the Mexican peso’s success has been its low volatility and record-high interest rates. This makes it very attractive for the carry trade where you borrow in one currency and lend in pesos. After accounting for inflation, Mexico has the highest real interest rates in Latin America which should keep the lure of money managers and other investors. Much of the faith by foreign investors in Mexico has come from President Andres Manuel Lopez Obrador’s, known as AMLO, fiscal discipline; especially when compared to the mounting deficit across other economies. AMLO’s chosen successor, Claudia Sheinbaum, is expected to win the Mexican presidential election this summer and continue the same policies and tone. 

The most liquid currency in Latin America received tailwinds last year from a fresh record of remittances from the United States and a trend known as “near-shoring” where business relocate factories in Mexico to be closer to the USA. 

Speculators have jumped on this trade in greater numbers than they have in years. Data from the Commodity Futures Trading Commission revealed leveraged funds increase their long bets on the peso to 57,711 contracts in the week ending April 9^th. This is the highest level since 2023.  Large speculators have the largest net long position since right before Covid lockdowns and asset managers alone have their largest net long position on record. April 9^th also marked its most recent peak before giving up all the gains it made this year. Large positions can lead to quick reversals when narratives change. The day after, April 10^th, was the release of US CPI data for March that came in higher than expected and led investors to start reevaluating the how much the Federal Reserve might adjust interest rates this year. Using the CME Group’s Fed Watch Tool, on April 9^th the futures markets priced in an 85% chance of at least 2 rate cuts – now they only price in a 50/50 chance. The markets were expecting the first rate cut in July (75% probability) – and that is only a 50/50 chance as well and the first rate cut expectation has been moved back to September. This shot interest rates up all along the curve in the US. 

Looking continuous Mexican peso futures (/6m) the relentless uptrend since last fall has found itself in a very sharp correction this last week. Sparked by a reassessment of US interest rate policy this year by the market, the peso gave up all the ground it made this year in just a few days. The previous low from mid-March was barely breached yesterday - however, it was not beached on the spot currency. This leaves the trend of higher-highs and higher-lows possibly intact. The downward momentum from 3 very large red candles in a row may break that trend. 

If the trend is broken, support can be found around the 2024 lows and the 200-day moving average around 0.057. The price close between the mid-term and long-term moving averages reflects the near to mid-term downtrend but the long-term trend has not broken yet. The 14-day RSI has plummeted to downtrend but not oversold at 33%. 

Beige Book 2:00 PM ET

EIA Crude Oil Inventories 10:30 AM ET

MBA Mortgage Applications Index 7:00 AM ET

Net Long-Term TIC Flows 4:00 PM ET