Wednesday, June 1, 2011

Driver of Long CADMXN @ 11.91 spot

A few days ago, on Twitter, I posted about a long CADMXN trade @ 11.91 spot ref.


In my opinion Mexico is a structurally worse country than Canada.
And Mexico's exports are MUCH MORE linked to the US than Canada's.

Canada is a Commodity behemoth: timber, coal, oil+gas, mining. Mexico has oil as very relevant.
Canada has a much more developed social, political and educational system.
Canada has no issue with crime+violence. Mexico does.

Canadian interest rates are already very low and its interest rate curve is not as steep as Mexico's. This means that not a lot of room for easing in rates, unlike Mexico, in case activity drops further. Last year, for example, the markets, for a brief moment, priced in rate cuts in Mexico. Mexico has a base rate of around 4.50%. Not to mention that Mexico has also a dovish central bank.

(A) I consider the "long Mexico" trade (through NDFs or local-currency-denominated bonds) more crowded than the "long Canada" trade.

If I am correct in (A) hot-money flows into Mexico have been considerable and the technical position of the market should be good for the trade.
Remmitances from the US to Mexico (from immigrants, hail to Western Union!) has not improved much since the crisis and the pace of increase has been reduced.

Mexico and its links to the Auto Industry will be more impacted by Japan, even if short-term. Recent economic data have shown that. Its job recovery hasn't been very robust either.
Its domestic demand hasn't fully recovered from the crisis, with industrial production or unemployment or retail sales levels still below those reached back in 2007-2008.

All-in-all, this is a low vol trade, with both currencies with very, very strong correlation to risk-on/risk-off behavior.
Tail-risk seems to be tilted to our side (CAD moving higher x MXN).

Canada has weaker links to the US and structural fundamentals look better in my opinion.
Drawback is certainly the carry. For a low-vol trade this makes a difference because the waiting costs money.

Tactical trade here. Not a long-term trade. Something for 1 month or so, 3-4% gain target.

(1) Links to the US
(2) Interest rates in Mexico can go much lower than Canada's
(3) Flows into Mexico I believe have been more speculative/short-term than Canada (FDI x bond buying for example)
(4) Levels CADMXN at the lows since 2009

*Disclaimer: charts and data are presented as I receive/see them. Sources are usually not checked for validation and my own calculations are of 'back of the envelope'-type. I am aware that some math that I do myself might be wrong and/or misleading to some extent. In financial markets the rate of change of economic data is often more important than the actual level and the perception of 'what is priced in' is more important than 'what is actually going to happen'. This is actually the way people pick entry and exit points. So... yes, sometimes you might say 'This guy is an idiot, this is way wrong!' with a high conviction, being right. Not to worry. Markets are made of expectations and the clash of conviction between its participants. Portfolio managers know that being an idiot is sometimes profitable and being smart is often a bad choice. It is all reality, sometimes good, sometimes bad. By the way: corrections to my analysis and intelligent debate is welcome. theintriguedtrader AT gmail do com

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