• FxWirePro: tactical FX positioning in latin american currency space – hedge likely u-turn in Mexican and chilean Peso

    Source: FxWire Pro - Insights & Views / 05 Jul 2016 07:59:50   America/New_York

    Mexican Peso: In recent days the MXN has started to play catch up to oil and the EM currency rally. Possibly US political risks are affecting the MXN, and if this is the case then the MXN could underperform the rest of EM through to the US elections.

    We prefer a tactical relative value trade (long MXNRUB) to position for the MXN re-coupling with oil (and other oil-linked currencies such as the RUB). Since USDMXN has been making continuous streaks bull swings but began testing resistance at 21DMA and signs of bears to resume their business are spotted out in intraday swings.

    1M ATM implied volatility of USDMXN is perceived to be at 15.36%, while ATM puts are trading at 12.95% which looks under-priced option and appears to be the decent volatile structure for option holders.

    With rising volatility gamma adds to the considerable risk and reward profile for both holders and writers.

    Thus, on a hedging perspective in the long term, using gamma factor in order to neutralize volatility factor, debit gamma put spreads are advocated so as to reduce the sensitivity and focus on hedging motive.

    Hence, shorting 1W (1%) OTM put option with positive theta is recommended to reduce the cost of hedging by financing long position in buying 1M ITM +0.51 delta put option at net debit to enter into this position.

    Chilean Peso: On 3-6 months’ time-horizon, the CLP is expected to underperform its regional peers on heavy dependence on copper exports, capital outflows, and unfavourable carry.

    A continued slowdown in Chinese growth and generally soft global demand are expected to weigh on copper prices (copper represents half of Chile’s exports).

    The main risk to our view of CLP underperformance is a surge in Chinese demand.

    Technically, we continue to be bearish in USDCLP in the short term, but likely to bounce back at 639.83 levels. On hedging grounds, it is advisable to stay short in mid-month futures for the downside risks. In the long run, one can also think of diagonal credit call spreads alternatively.

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