Peso Volatility Spikes on Sheinbaum, Asian Markets Wary

Key Takeaway

• The Mexican peso faces significant volatility, with USD/MXN exchange rate spiking after President-elect Sheinbaum's comments and political uncertainties.
• Peso's one-month volatility surged to 19% post-election, potentially prompting the central bank to maintain higher interest rates longer.
• Asian currencies also face challenges due to US Treasury selloff and upcoming US CPI data, with the Japanese yen particularly vulnerable.

Peso Volatility Persists

The Mexican peso has experienced significant volatility recently, with the USD/MXN exchange rate jumping higher following comments from President-elect Claudia Sheinbaum. Sheinbaum announced that she would name her cabinet next week and expressed her belief that reform discussions would not impact the peso. However, the market reaction suggests otherwise, as the peso has been under pressure.

Sebastian Boyd from Bloomberg noted that the peso's recent performance has been particularly challenging. The currency, which had been a popular long position, saw a sharp decline following the Morena party's better-than-expected performance in the June 2 election. The long MXN, short JPY trade returned 32% over the 12 months through May, but this has now fallen to 18%, underperforming the S&P 500. Boyd highlighted that the peso's attractiveness for carry trades might diminish if volatility remains high, as traders could seek other options.

Political Uncertainty

The political landscape in Mexico is contributing to the peso's volatility. The Morena party's proposed constitutional changes, such as scrapping independent regulators and making judges elected at all levels, are seen as potentially off-putting to foreign investors. While these changes are theoretical and long-term, they add to the uncertainty surrounding the peso.

Boyd pointed out that the peso's recent weakness might prompt the central bank to keep interest rates on hold, maintaining higher rates for longer. The one-month volatility in the peso doubled to 19% following the election, up from 9.2% a week before the vote. This increase in volatility indicates that the market was unprepared for the election outcome. Investors will need to wait for volatility to subside before the peso can recover.

Comparative Analysis

The peso is not the only currency facing challenges. Asian currencies are also experiencing volatility due to a selloff in US Treasuries and upcoming US CPI data and the FOMC meeting. Mary Nicola from Bloomberg reported that Asian FX traders are closely watching the euro after significant political developments in France and Germany. The Japanese yen remains vulnerable, with the Bank of Japan potentially discussing scaling back bond-buying operations and hinting at a July rate hike.

In India, the reappointment of Prime Minister Narendra Modi is expected to stabilize the nation's assets. Foreign investors are cautious on equities but continue to invest in bond markets, and currency stability remains a priority for the central bank.

Management Quotes

• Claudia Sheinbaum, President-elect of Mexico:

  "I’ll name cabinet next week."
  "Doesn’t think reform discussions will impact MXN."