🐍🦅 Mexican Peso Is Still Attractive For Carry Trades: Cable FX Macro

• An FX carry trade is when you borrow (funding) a low-yielding currency to buy a high-interest currency (target) to exploit the carry or rate differential in the exchange rate. This trade works as long as there is low volatility and the spot does not move against you dramatically. Volatility spikes can cause global portfolios to trim risk and move money back into funding currencies. That is why carry trades are mostly considered a "risk on" strategy.

• The MXN/JPY carry trade (long Mexican peso / short Japanese yen) has been one of the more attractive and resilient high-yield strategies over the last year (roughly Feb 2025–Feb 2026), thanks to a persistently wide interest rate differential between Banxico and the BoJ, even as global carry dynamics shifted.

• Central bank monetary policy divergence led to a carry pickup of ~7–9.5% annualized (sometimes cited up to 10–11% earlier in the period), making MXN/JPY a top positive-carry pair globally—often ranking #1 among JPY-funded trades alongside things like TRY/JPY or AUD/JPY.

• I have recently noted risks to this trade which I hope you take from this note, however, the peso remains an attractive target despite factors moving against the broad carry regime. The BoJ's gradual hikes (e.g., Dec 2025 move) and verbal/tacit intervention signals have narrowed differentials over time, raising unwind risk. Also, positioning has been flagging stretched in the peso for some time. It is no coincidence that the MSCI World Index moved higher (a benchmark for global risk appetite), but the peso has failed to break above resistance.

• MXN/JPY held up relatively well. Unlike sharper unwinds in past cycles (e.g., 2024 summer), the peso's resilience (strong carry demand, solid Banxico stance despite easing) kept it from the worst of the volatility. Desk chatter has noted the peso's carry is still "showing signs of life" in pairs like this, though global growth fears and flattening curves are challenging the rally. The spot MXN/JPY recorded a gain of 15.3% last year.