Once again, there is an opportunity to implement arbitrage strategies. We have had a negative outlook on the MXN for some time, and our view remains unchanged. This is due to several factors: a deterioration in fundamentals, a slowdown in the economic cycle, ample scope for Banxico to reduce interest rates, and an anticipated increase in risk premiums due to structural reforms and a packed political agenda in Mexico and the US.
Volatility in the USDMXN spot market has coincided with a distortion in the forward curve. In recent weeks, implied rates in the MXN forward curve have been decreasing as the FX markets adjust to a more dovish outlook in the 9M-2Y segment compared to money markets. Specifically, since implied rates in these tenors are significantly lower than Cetes rates (with a difference exceeding 60bp), there are currently opportunities to buy pesos in the spot market, while simultaneously selling them on the forward curve, while remaining long on deposit rates.
Arbitrage opportunities are non-existent in tenors up to six months. In fact, for the 1M and 2M tenors, the implied rate in the forward curve exceeds that of Cetes. This is primarily due to the aforementioned busy agenda and, more importantly, the higher rate coincides with US election week. Notably, implied volatility has increased significantly across the entire term structure, and there is currently a distortion in the 2M tenor as well.
Overall, while we do expect a mean reversion towards the end of the year and into 2025, the case for a movement towards USDMXN levels around 21 remains fairly clear at present. In the meantime, we would capitalise on arbitrage opportunities while maintaining a cautious near-term stance on the MXN.