Heads Up: Major Carry Trade Unwind - Mex Peso

Crowded long MXNJPY -5% and falling contributes to JPY strength, with further implications on downside for risk assets, crude oil, and CTA positioning.

Mex peso is getting hammered right now, particularly against JPY.

Market reaction is being attributed to the election victory of Claudia Sheinbaum by a 30 point margin and a ⅔ supermajority legislature of the ruling party of outgoing President AMLO - despite her win being largely expected, and the newly re-elected government of the existing ruling party, as the view seems to be one of an “unchecked, anti-business” agenda in store.

As you may have correctly assumed (and frankly, what you are counting on me to do) - I don’t care what the Mexican government agenda (or any government agenda for that matter) will be either way - I focus strictly on the behavior of green and red blinking tickers. Here are some of the market implications of a 5% intraday drop in the world’s most favored long carry trade.

MXNJPY

Although (much to Japan MOF’s annoyance) JPY is the world’s go-to default sell-leg paired against whatever other long currency for the carry trade, Long MXN / Short JPY has been the carry trade pair for the carry trade.

MXNJPY was +18% in the past year until May 31st (pre-Mexico election results) vs USDJPY +12% over that same period.

This performance divergence of MXNJPY vs USDJPY is the product of both a weak JPY AND MXN strength (against USD respectively) happening simultaneously - as opposed to other short JPY carry trade FX pairs for which the long currency side is flat to down vs USD. That’s what makes the long MXN trade unique.

Carry trades are often correlated with risk asset upside trends, either because carry trade proceeds can sometimes be used to then directly fund long risk positions, or because knowledge of that linkage’s existence works its way into cross-asset correlation seeking systematics and algos’ programming, thereby making it self fulfilling.

AUDJPY was the dominant carry trade pair during times of carry trading re-emergences (and still is) - but over the past year or so of JPY downside, MXNJPY had emerged to “rival” AUDJPY in risk asset correlation.

So, when you see massive intraday trend reversing moves in the long MXNJPY carry trade like this…

…as well as charts like this…

…and this…

…then, we - all of us (whatever market it is that you’re in and care about) need to pay attention to green and red blinking ticker MXNJPY.