One-month implied volatility on the Mexican peso/dollar cross leaped to 11.5% last Wednesday, a percentage-point jump on the previous day. The increase came as the Cete, Mexico's benchmark 28-day Treasury bill, fell to one of its lowest yeilds. This prompted many to pull money out of local fixed income and reinvest either in local equities or get out of the country altogether all of which puts pressure on the peso, noted the trader. As Mexico's currency dived through key technical levels the currency also saw profit taking which further encouraged investors to leave the market, he added.
The Mexican peso slid to MXN10.50 on Wednesday, down from MXN10.40 the week before, said the trader. Peso holders were buying peso puts/dollar calls as protection against a strengthening of the greenback, he added. The peso may continue to depreciate, going as high as MXN10.60 although a wholesale depreciation of the currency is not anticipated, he predicted.
Larry Brickman, currency strategist at Bank of America in New York, predicted the peso will continue its devaluation against the dollar, expecting the Mexican currency to reach MXN10.88 in six-months. Spot is experiencing the beginning-of-the-end of a rally, which began in March, he said. Inflation is stabilizing and there are no foreseeable rate hikes on the horizon and this is dragging down the currency, explained Brickman.
USD/MXN Spot & One-Month Implied Volatility
