Key Moments
- Heightened rates market volatility is prompting a broad unwinding of EM FX carry trades, placing notable pressure on LatAm currencies.
- USD/MXN has climbed 8% since the middle of September, making the Mexican peso the weakest LatAm currency since the start of September.
- Leveraged funds hold their largest net long MXN position since the beginning of 2023, amplifying the squeeze as implied volatility rises.
Carry Unwind Hits Latin American FX
MUFG’s Derek Halpenny highlights that increased volatility in rates markets is spilling over into foreign exchange, triggering a broader unwinding of emerging-market carry trades, with Latin American currencies particularly affected. As volatility has picked up, investors are cutting exposure to high-yielding EM FX positions, putting additional pressure on the region’s currencies.
“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.”
Mexican Peso Underperforming as Positions Unwind
According to Halpenny, the Mexican peso has come under pronounced strain. Since the middle of September, USD/MXN has risen 8%, leaving MXN as the weakest performer among Latin American currencies since the start of September. The move has been exacerbated by the build-up of leveraged long positions that are now being forced to unwind as implied volatility jumps.
“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.”
Positioning and Risk Sentiment
The latest positioning data underscores how crowded the long MXN trade has become among leveraged investors. With leveraged funds holding their largest net long exposure to MXN since early 2023, the pickup in volatility is intensifying liquidation pressure as positions are unwound.
| Metric | Detail |
|---|---|
| USD/MXN performance since mid-September | Up 8% |
| LatAm FX performance ranking | MXN is the worst performing LatAm currency since the start of September |
| Leveraged funds positioning | Largest long MXN position since the start of 2023 |
Safe-Haven Currencies Benefit
Halpenny notes that the current backdrop of elevated risk aversion may still have room to run. In the G10 space, traditional safe-haven currencies have been the main beneficiaries of this shift in sentiment.
“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.”
TradingPedia.com is a financial media specialized in providing daily news and education covering Forex, equities and commodities. Our academies for traders cover 
