Mexican Peso: Carry liquidation pressures LatAm currencies – MUFG

MUFG’s Derek Halpenny notes that rising rates volatility is driving a broader unwind of EM FX carry trades, with LatAm currencies under particular pressure. USD/MXN has surged and MXN long leveraged positions are being squeezed as implied volatility jumps.

Volatility-driven unwind in LatAm FX

"We have been flagging the increased risk of the volatility in the rates market spreading to other markets and the increased risks of a broader liquidation of carry positions. EM FX is certainly seeing that now with significant moves in LatAm FX as carry liquidation intensifies."

"Since the middle of September USD/MXN has now jumped 8% and is the worst performing LatAm currency since the start of September. IMM positioning data explains why MXN is suffering. The latest data shows Leveraged Funds’ long position at the highest level since the start of 2023."

"This risk aversion could well have further to go. In G10, the Swiss franc and the yen were the top performing currencies yesterday and those moves could extend further."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)