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Forex Flash: Long BRL and MXN positions still favoured - HSBC

FXstreet.com (Barcelona) - HSBC analysts note that withing that LatAm space, long BRL and MXN positions continue to be favoured.

Firstly, they see that long BRL positions by foreigners on the BM&F are up from USD6bn a month ago to around USD8bn now, their highest level since September 2011. They add that speculative long MXN positions on the IMM are up to USD5.8bn, close to the recent highs seen in January (USD6.1bn). Additionally, the add that USD/LatAmFX remains close to recent lows.

Looking first at BRL, they note that long BRL positions increase to USD8bn from USD6bn a month ago, the highest level seen since September 2011, just after the CB began its 2H’11 easing cycle. They feel that this implies that long BRL positions may be reaching relatively stretched levels. Further, central bank intervention to keep the USD/BRL within a relatively narrow range (1.95-2.03 approx.) which makes long BRL carry trades attractive, and so unless we see a break of this range, a significant unwinding of positions seems unlikely. Additionally, they see that net exporters’ unremitted receipts have risen to long USD15bn, which is the largest long USD position for these accounts since 2Q’11. They write, “These relatively large long USD positions should act to cap topside moves in the USD/BRL.” These, along with investors’ (USD8bn) and banks’ (USD8.3bn) short USD positions, should help the Central Bank to keep the USD/BRL range-bound

Moving to MXN they comment that long MXN (short USD) speculative IMM positions have increased again to USD6bn as of 9 April, the most recent data point. They feel that this fits well with the MXN’s recent rally against USD, which reached a peak of 12.02/USD on 11 April. Since then, they have seen some consolidation in the USD/MXN around the 12.20 level, which may have resulted in some unwinding of these positions. However, being close to historic highs, excessive long MXN positions may imply some risks of a correction higher in the USD/MXN, short term. Additionally, they note that Japanese investors appear to be increasingly interested in local Mexico debt, and the recent BOJ easing may accelerate these inflows. However, they see that existing Toshin holdings in Mexico represent only 1% of total foreign assets, leaving much room for further increases, in our view. They write, “We expect flows into the local bond market to continue as the rotation into Mexican debt is more structural than cyclical, in our view.”

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