This bad boy has been in the news ever since Donald Trump was about to become the President of the United States and almost every day since. Why might you ask?
There are a lot of reasons why actually. There is talk about building a border for one. There is also talk about a border tax that may tax goods coming into the United States from Mexico at a 20% rate. The Mexican Peso also trades opposite to the US Dollar.
For all of these reasons and more, the Mexican Peso is all the buzz. And when there is more buzz about a currency, especially one that can be traded, there is more liquidity. If we want to have exposure to the Mexican Peso, should we trade Mexican Peso futures or the Mexican Peso ETF?
The Mexican Peso
Hands down, the best way to have exposure to the Mexican Peso is the /6M Mexican Peso futures traded on the CME. Like all futures, this product can be traded during Globex hours by anyone who has future permissions in their online brokerage account.
Let’s run through some stats about this futures contract. For starters, the price of one contract is .05115 and each contract is worth 500,000 Mexican Pesos in US Dollar terms. The minimum tick or smallest value between two prices is .00001. Each tick value is $5. The total notional value of a Mexican Peso futures contract is then $25,575 and requires an initial margin of $1,925. What this means is that if you are permissioned to trade futures, you are able to have 13x leverage when trading the Mexican Peso.
There is some decent liquidity in this product as well. There were 68,226 contracts traded on Friday, March 3 which would mean the total notional value of futures traded on that day was about $1,744,879,950. Close to 2 billion bucks, seems like there is definitely some interest in here.
On the downside, however, there was only one option contract traded. That is a very bad sign as only pure speculators must be involved in the Mexican Peso futures rather that investors. If investors were involved in this contract there would be way more interest in the options market.
While this isn’t the largest contract in the world, what can we expect to make or lose in a given day by trading this product? Right now the daily expected move in /6M is about 4%. 4% of the Mexican Peso futures would be 205 ticks and at $5 a tick, the daily expected profit or loss would be between up or down $1,025.
Because this is a large contract and the lack of options liquidity, we do not recommend trading Mexican Peso futures at all. Let’s have a look and see if there is a Mexican Peso ETF that we can trade instead if we want the same kind of exposure.
Mexican Peso ETF?
A simple Google search for a Mexican Peso ETF would have you land on the symbol $FXM (CurrencyShares Mexican Peso Trust). That makes sense. The ETF for the Euro Currency is $FXE, so $FXM makes sense. When I tried to load up $FXM in my trading platform it never loaded. I am going to pass on that immediately since I cannot even figure out if it trades or not.
That did not stop our search in finding a legit Mexican Peso ETF. We stumbled upon $EWW (iShares MSCI Mexico Inv. Mt. Idx. ETF). That’s a pretty loaded name.
Remember, there are two tests that must pass before we can decide if an ETF for a futures contract is a viable way of getting the same exposure to the futures contract with a fraction of the price or risk. Can $EWW be a legit replacement here and become the Mexican Peso ETF? Let’s see how it’s correlation to the Mexican Peso futures is.
In the chart above, we have the Mexican Peso futures (green/red) compared to $EWW. Fortunately for us, $EWW and /6M have a 98 correlation which means they are ridiculously correlated.
On thing to note here. $EWW is not a product that is 100% specific to tracking the Peso. However, it doesn’t matter what it is supposed to do. It is highly correlated to the Peso. It wouldn’t matter what symbol or the name of the stock/ETF, as long as it is highly correlated.
Now that correlation passed with flying colors, does $EWW have sufficient liquidity? Remember, liquidity is the most important factor here.
We are writing this post on a weekend and do not have access to live bid/ask spreads. However, looking at stock volume should give us a good guestimate of the width of the bid/ask spread. Let’s see how much stock volume $EWW does.
HELLO. $EWW is a player. Over 5 million shares tell me a few things. It tells me there is large institutional interest. It also tells me that the bid/ask spread on the stock would be very very very tiny. Huge thumbs up here. The total notional value traded here was $244,399,699.72. Big boy numbers.
If the stock volume is that high and there are institutions involved, I am sure the options volume should be very nice as well. If the options volume is in the thousands, $EWW will 100% be our Mexican Peso ETF.
Ah…the sweet sound of victory. We have found a winner, folks. $EWW is truly the Mexican Peso ETF. This many options contracts traded in one day tells me there is a lot of participation from institutions. 15,313 options contracts traded in one day is a notional value of $73,441,148. And better yet, $EWW not only has weekly options
but it also has super tight options markets.
$EWW is the Mexican Peso ETF
Want exposure to the Mexican Peso and don’t want to trade the futures contract (you shouldn’t)? Have no fear…$EWW is here!