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🏦🇲🇽Mexico Bond Switch Cleans Up Positioning: UBS

Where are the pain trades / overcrowded positions?

After the Banxico decision on Aug. 12, the government announced a bond switch operation where they bought MXN70 bn of 1.5y Mbonos and sold a similar amount of floating-rate notes of that tenor. Those investors that owned those Mbonos hedged against TIIE then received that sector. Given the size of the operation (roughly 500k in the front end), there was a large interest to receive ly-2y, which had been underperforming into the monetary policy decision. The desk thinks this last move likely cleaned positions and interests are more balanced. Positioning in USDMXN remains balanced with faster money remaining nimble and real money structurally long MXN.

What looks especially rich or cheap?

Front-end TIIE is back at the lows, with 1y pricing just 100bp of hikes at one point on Monday's session (terminal rate of —5.50% at the time). The desk retains the view of paying the front end on dips and would look to reload a payer in the 1y-2y sector.

What market events will be pivotal for FX?

The second half of August tends to be very illiquid for Mexico rates. This week specifically is very light in terms of local data. CPI continues to be the most salient data point, we will only have a fresh print next week -- along with GDP, IGAE, and Banxico Minutes, which will be very interesting. $MXN continues to take cues from external sentiment and remains in a very contained range.

Where are our customer interests focused?

Clients are starting to put on flatteners in the belly of the TIIE curve. With 2s5s selling off 15bp from before the Banxico meeting, it makes sense to take off steepeners or initiate flatteners in that sector. Clients have been net better buyers of USDMXN this week on moves towards the 19.80 support. 2021 tenors in FX swaps have seen better paying interest with IMM rolls not quite in play yet.



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