Mexican Peso Volatility Ahead of US Elections: JPMorgan's Derivatives Trade Recommendation

Key Takeaway

• JPMorgan recommends hedging US election risk for the Mexican peso with a derivatives trade, citing potential volatility.
• The peso has appreciated 19% over 24 months to 16.7 per dollar, driven by low volatility and high interest rates.
• Despite US election concerns, JPMorgan remains constructive on the peso due to rising remittances and near-shoring trends.

Peso Volatility and US Elections

The upcoming US elections in November are expected to cause more volatility for the Mexican peso than the domestic elections in Mexico, according to JPMorgan Chase & Co. The bank, which holds an overweight recommendation for the peso, suggests a derivatives trade to hedge against this anticipated volatility. Specifically, JPMorgan strategists, including Saad Siddiqui and Tania Escobedo Jacob, recommend selling a three-month USD/MXN digital call with a strike price of 18.50 and going long on a six-month digital call at the same strike price.

“Headline risk is likely to increase if the emphasis continues to be put on concerns around Chinese evasion of tariffs through Mexico,” the strategists noted. They prefer to hedge the risk of a more contentious approach to trade or migration via a calendar spread. The Mexican peso has rallied 19% over the past 24 months to around 16.7 per dollar, making it the best-performing developing nation currency during this period due to low volatility and high interest rates. It is one of the few major currencies gaining against the dollar this year, despite concerns that it has become too expensive and that positioning is too crowded.

Mexican Peso Performance

The Mexican peso has shown remarkable resilience, emerging as a top performer among developing nation currencies. Over the past 24 months, the peso has appreciated by 19% against the US dollar, trading around 16.7 per dollar. This performance is attributed to low volatility and high interest rates, making it one of the few major currencies to gain against the dollar this year. The peso has repeatedly defied predictions that it has become too expensive and concerns about crowded positioning.

Mexico is set to hold presidential elections on June 2, with Claudia Sheinbaum, the candidate backed by President Andres Manuel Lopez Obrador, leading in opinion polls. While US President Joe Biden and former President Donald Trump have not recently taken a stance on the USMCA trade deal, the agreement, which replaced NAFTA in 2020, is up for review in mid-2026. Some analysts believe that a Trump administration would be more likely to invoke the USMCA review clause to push for better terms, potentially leading to some degree of trade rerouting.

JPMorgan's Constructive View

Despite the potential noise from the US elections, JPMorgan maintains a constructive view on the Mexican currency. The peso benefits from rising remittances and "geopolitical dividends" from the near-shoring trend, which is leading manufacturers to move facilities to Mexico. The strategists wrote, "The peso is no longer the high-beta risk proxy currency of old, but a more stable currency on a secular appreciation trend. This makes it one of the most attractive EM currencies to own over the medium term."

The peso's stability and appreciation trend make it an attractive option for investors. JPMorgan's recommendation to hedge against potential volatility through a derivatives trade reflects their cautious optimism. The bank's strategists suggest that the peso's performance is supported by structural factors, including the near-shoring trend and rising remittances, which provide a buffer against external shocks.

Street Views

• Saad Siddiqui and Tania Escobedo Jacob, JPMorgan Chase & Co. (Overweight on the Mexican peso):

  "Headline risk is likely to increase if the emphasis continues to be put on concerns around Chinese evasion of tariffs through Mexico... We prefer to hedge the risk of a more contentious approach to trade or migration via a calendar spread."

• Saad Siddiqui and Tania Escobedo Jacob, JPMorgan Chase & Co. (Constructive on the Mexican peso):

  "The peso is no longer the high-beta risk proxy currency of old, but a more stable currency on a secular appreciation trend... This makes it one of the most attractive EM currencies to own over the medium term."