Standard Chartered’s Dan Pan and Erwin He note that Banxico’s surprise 25 bps cut and guidance for another easing step have increased downside risks for the Mexican Peso (MXN). They highlight crowded MXN long positioning and a narrower carry advantage versus other EM high-yielders. The bank now sees short MXN positions as increasingly attractive given weak domestic growth momentum.

Peso seen vulnerable after surprise easing

“We see a risks of further downside pressure on MXN, and we like USD/MXN as an EM risk hedge with upside convexity in case of a re-escalation of the Middle East conflict.”

“We suspect that MXN long positioning remains crowded, particularly among CTAs and longer-term investors.”

“MXN’s carry advantage has narrowed relative to EM high-yielding peers, and with Banxico signalling another cut and looking through concerns about inflation pass-through from FX weakness, we think short MXN positions may start to look more attractive to market participants, particularly with domestic growth momentum remaining weak.”

“Risks are biased towards more rate cuts as growth momentum remains clouded by uncertainty over re-negotiation of the USMCA trade deal.”

“That said, the continued inflation run-up may constrain room for additional easing.”

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