Mexico’s year-on-year gross domestic product growth was 0.1% in the first quarter. This was below the expected 0.8%.
The result points to slower economic growth compared with forecasts. The figures compare actual performance with the market expectation for 1Q.
Mexicos Growth Shock And Peso Implications
The first quarter growth of 0.1% was a significant shock, falling well below the 0.8% we all expected. This data immediately weakens the case for the Mexican Peso, which has been propped up by high interest rates and a stable growth story. We anticipate the popular carry trade will begin to unwind, putting sustained upward pressure on the USD/MXN exchange rate.
This dismal growth figure puts Mexico’s central bank, Banxico, in a difficult position with its policy rate currently at 9.75%. The market was pricing in potential rate cuts for the third quarter, but we now see a strong possibility of a cut as early as the next meeting in June. We believe traders should position for a dovish pivot by looking at interest rate swaps that would benefit from lower rates.
The outlook for Mexican equities has also soured considerably, as slowing economic activity directly translates to lower corporate earnings. This domestic weakness is compounded by recent reports showing a slowdown in the US manufacturing sector, which is a primary consumer of Mexican industrial exports. We feel that buying put options on the iShares MSCI Mexico ETF (EWW) is a straightforward way to position for a potential market downturn.
Volatility In Peso Markets And Trading Strategies
Such a large economic data miss will almost certainly increase market turbulence over the coming weeks. Implied volatility on Peso options has already jumped from around 12% to over 15% since the number was released, a level we haven’t seen since the uncertainty of early 2025. This environment suggests that long volatility strategies, such as purchasing straddles, could be profitable as we anticipate wider price swings.
