MXN opportunity

Political risk premium high due to election and NAFTA negotiations


Factors supporting the trade:

  • High real interest rates, good carry
  • AMLO: buy rumour sell fact, will be constrained by institutional mechanisms, congress
  • Central bank is independent and has credibility. Despite his belligerent rhetoric, he had reputation of fiscal responsibility as mayor of Mexico City. His proposed cabinet team seems credible.
  • Solid growth prospects, overheating economy in the US is positive for Mexico due to export channel
  • Current account not excessive
  • NAFTA unlikely to change much
  • Structural reforms over the past 5 years likely to bear fruit in the coming years



Factors against the trade:
AMLO may end up derailing fiscal sustainability, attack institutions
Positioning: CFTC positioning showed net longs of MXN vs USD until early June

Trade recommendation: Long MXN, against USD, EUR and JPY
Date: 20/06/2018
Entry levels: Sell USDMXN 20.51, Sell 23.70, Stop Loss (based on USDMXN, 22.31), Target: 17.5

Update: After pre election weekend rally, added Stop Loss at entry level.



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