Trade of the Day for May 1st, 2013 – Long USD/MXN

Beware Mexico and the Falling Wedge

Investors have been in love with Mexico in 2013.  The nation has managed to shift the focus from its drug-riddled violence to its new government and an aggressive reform agenda.  There are a number of factors acting as a tail wind for the MXN appreciation.

1. Growth.  Mexico in 4Q2012 great at 3.2% y/y compared to the US 0.4% – the better growth made many argue that Mexico is a turbo-charged beta to the US economy.
2. Inflation. The central bank in Mexico continues to see its credibility rise as core inflation has been tame – the bank cut rates in March as MXN gains allowed them room on import price risks.
3. Liquidity.  Mexico has managed to gain favor against the rest of LATAM with its MXN liquidity being transparent and electronic and unfettered by capital controls.  The bond market is big enough for international flows and the yields remain attractive.