Mexican Peso: Carry liquidation pressures LatAm currencies – MUFG
MUFG’s Derek Halpenny notes that rising rates volatility is driving a broader unwind of EM FX carry trades, with LatAm currencies under particular pressure. USD/MXN has surged and MXN long leveraged positions are being squeezed as implied volatility jumps.
MUFG analyst Derek Halpenny highlights that higher interest rate volatility is causing a widespread unwind of emerging market (EM) foreign exchange carry trades, with Latin American currencies facing significant pressure. The US dollar against the Mexican peso (USD/MXN) has surged by 8% since the middle of September, making it the weakest performing Latin American currency since the start of the month.
This surge is driven by increased implied volatility in the rates market, leading to a higher risk of a broader liquidation of carry positions in EM FX. Leveraged funds' long positions in MXN are at their highest since early 2023, further exacerbating the situation. While regional currencies like the Swiss franc and Japanese yen have shown gains, the risk aversion could continue to impact other currencies.
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