Speculation about the likely size of the next U.S. interest rate cut ahead of the Federal Open Market Committee meeting on May 15 saw a surge in Mexican peso/U.S. dollar options activity last week. James Kennan, v.p., Latin American currency options trading at BNP Paribas in New York, said the FOMC might cut rates by as much as 50 basis points. An easing of this magnitude is expected to see further peso appreciation in the spot market.
On Wednesday, the Mexican peso was trading at between MXN9.15 and MXN9.22 in the spot market, according to a foreign exchange trader in London, who added that the peso has been steadily rising against the U.S. dollar in recent weeks. Implied one-month volatility, meanwhile, declined to a little more than 8.75% last Wednesday. On April 30, one-month implied volatility had been at 10.10%, according to a foreign exchange trader in New York.
BNP Paribas' Kennan reported hedgers were purchasing one-week at-the-money forward options struck at MXN9.25 in typical sizes of USD20 million when implied vol was around 9%.
The foreign exchange trader in London said that some hedgers were purchasing Mexican calls to protect themselves against further strengthening of the peso against the U.S. dollar.
