The forex market is experiencing a period of quiet trading with little direction and low volatility. It is expected to remain subdued until the release of the US core Personal Consumption Expenditures (PCE) report on May 31.
This climate of low volatility has led to increased interest in carry trades, and Saqib Iqbal, a financial analyst at Trading.biz, explains why the MXN/JPY trade is particularly attractive in the current market.
- The forex market is experiencing low volatility until the US core PCE report on May 31.
- Low volatility boosts interest in carry trades, with MXN/JPY being particularly attractive.
- MXN/JPY could reach 9.50 if Japanese inflation falls and the market doubts the BoJ’s interventions.
He says, “A low-volatility environment makes the Japanese yen the most attractive funding currency. Historically, yen-funded carry trades have underperformed during such periods. This makes the MXN/JPY pair an excellent choice for carry trading right now.”
March saw a 25 basis point cut in interest rates by the Bank of Mexico (Banxico). However, at the May meeting, the central bank unexpectedly turned hawkish, indicating that the current policy would be maintained.
The bank said that it will not cut rates independently of the Fed due to significant revisions to its core inflation forecasts. The policy of maintaining a strong peso for a few more months was the reason behind this stance. This keeps the high-risk adjusted carry of MXN a go-to strategy with the ultra-low JPY.
Looking ahead, the sustainability of BoJ’s (Bank of Japan) interventions remains a key point of uncertainty.
Saqib believes that if the market starts to question Japan’s interventions, a move to the 9.50 level for the MXN/JPY pair is possible within the week. Also, if forecasts for a fall in Japanese inflation in April are realized this Friday, the MXN/JPY will move higher.
