The Mexican peso has outperformed its regional and most EMFX peers over the course of last year. To the dollar, MXN broke below the psychological level of 18.0 as an attractive carry, geopolitical developments and a relatively stable macroeconomic outlook lured investors into Mexican peso denominated assets
We see both global and domestic risks to the MXN, the former has a list going from a reemergence in volatility to a higher for longer Fed. On the domestic side, we see peso decoupling from long-term drivers and extended long positioning
The Mexican state oil giant has recently been under pressure as it fails to sustainably grow production without adding to its debt, Pemex is the most indebted oil producer in the world and its gloomy outlook will require continued support from the Federal government. This is where the sovereign credit rating runs a risk of further revisions. On positioning, our Cable FX Macro IMM Positioning report noted leveraged funds adding to MXN futures, the percentage of open interest rose to 27.0% before the mid-February figure of 25.1%. These readings are above the 1-standard deviation band from its 5-year average, meaning long positioning in Mexican peso futures is overextended
Having said this, we would see any opportunities on the range of 18.0-17.85 to take profit on MXN longs. We would like to remind you that we're heading into a prevalent seasonal period of low vol, this may support the high-beta FX complex over the short-term and give traders an opportunity for taking some chips off the table in MXN
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