Mexican Peso Volatility Spikes After Morena Party Landslide Victory

In response to the overwhelming success of Mexico‘s ruling Morena party in Sunday’s presidential election, traders in Mexico are rushing to secure currency options after the victory of Claudia Sheinbaum raised market concerns.

Implied peso volatility has surged to levels not seen since October, with demand for options spiking the one-month gauge to over 16% from 9.2% in a week.

Following the landslide win of Sheinbaum, there are growing anxieties about potential constitutional reforms as Morena and its allies edge towards a super-majority in Congress.

Thierry Wizman, the Global FX & Rates Strategist at Macquarie, believes that significant fiscal and monetary policy changes in Mexico are unlikely as long as fiscal responsibility and central bank autonomy are maintained.

The Mexican Finance Minister Rogelio Ramirez de O has assured the markets of financial discipline and a reduction in public debt, calming some fears amidst the uncertainty.

This sudden surge in peso volatility has placed the Mexican peso at the forefront, with the currency now showing the highest implied volatility compared to other main currencies and the second highest across all major currencies, behind only the Russian ruble.

The 25 delta risk reversal, a measure of the pricing difference between a dollar call and put, has risen to 4.1%, emphasizing traders’ willingness to hedge against further peso depreciation.

In broader Latin American markets, the risk-off sentiment triggered by Mexico’s political developments has weakened currencies like the Brazilian real, Chilean peso, and Colombian peso.

The US dollar has strengthened as investors reevaluate interest rate expectations in light of recent economic data, further pressuring Latin American currencies.

Sheinbaum’s victory has produced political ripples beyond Mexico, impacting the financial markets of neighboring Latin American countries in a broad risk-off sentiment.

The reassurances of finance ministers and policymakers will be closely watched to ensure fiscal discipline and central bank independence amid these political shifts, influencing the economic trajectory of the region.