Mexican Peso Volatility Surges After Morena Party Election Win

Mexican traders have shown a heightened interest in currency options following the decisive victory of the ruling Morena party in the recent election. The surge in implied volatility has reached the highest level since October, causing a rush for options among traders. The Mexican peso is now experiencing the highest implied volatility among 16 main currencies and is the second highest among all 31 major currencies tracked by Bloomberg, trailing only the Russian ruble.

Market demands for options have pushed the one-month gauge to over 16%, a significant increase from 9.2% less than a week ago. The need for protection has also led to the Mexican peso’s risk reversal hitting 4.1%, close to testing the highest level in over two years, as traders are actively hedging against potential depreciation in the currency. The 25 delta butterfly, indicating the price of options far from the spot level, has risen to 0.58% from 0.37% just a week ago.

Amidst this surge in volatility, the Mexican peso has depreciated by 1.7% on Tuesday following a 4% drop on Monday. Despite being the worst performing currency globally currently, high-yield currencies are facing challenges due to losses in commodities and stock markets. The broad risk-off sentiment in the market has intensified pressure on the peso and prompted carry traders to reduce their positions on what was until a few weeks ago the best performing currency in the world.

(Adds data on option butterfly. An earlier version corrected the spelling of Morena.) ©2024 Bloomberg L.P.