Peso holds firm with carry intact as market digests S&P rally ahead of CPI data

Good morning!

The Day's Signal: carry alive in a rising-rate environment

The most notable data point this morning isn't the USD/MXN — which is simply consolidating — but rather the combination of an S&P near recent highs (7,537) alongside a UST 10Y that keeps climbing, now at 4.50%. That's a classic mixed signal: equities say risk-on, fixed income says caution. The VIX at 15.90 and the MOVE at 65.76 confirm that implied volatility is low and contained, but the direction of yields is the factor to watch most closely. The 2s10s curve positively sloped at 35 bps, rising from the short end (1M at 3.70%) to the long end (30Y at 4.98%), points to a gradual normalization rather than systemic stress.

The Peso and the Carry: the differential holds

USD/MXN at 17.43 sits comfortably below resistance at 17.6732 and well above support at 17.3597, defining a clear near-term trading range. The Banxico-Fed carry differential at 2.87 pp (6.50% vs 3.63%) remains the peso's main anchor. Realized vol at 7.01% is low, which reduces the cost of holding long peso positions and makes carry strategies viable without aggressive hedging. My view is that as long as the carry differential stays above 2.50 pp and the VIX doesn't break convincingly above 18-20, the structural bias for the peso remains constructive. There is no immediate catalyst to justify a breakout above the 17.67 resistance.

Rates and the Curve: the long end is in charge

The UST curve has an interesting shape: the short end (1M-1Y) reflects policy already priced in, while the 10Y at 4.50% and the 30Y at 4.98% suggest the market is beginning to demand more term premium for duration. This long-end steepening can pressure emerging markets if it accelerates, as it raises the opportunity cost relative to EM carry. Mexico's 28-day TIIE at 6.75% above Banxico's 6.50% shows the local market has priced in a normalization bias, albeit without urgency. The key number on Thursday will be Mexico's CPI: sticky inflation keeps the differential alive; faster-than-expected disinflation could pull forward Banxico cuts and compress the carry.

Looking Ahead: the calendar sets the pace

Two events define the narrative over the next several days. First, Mexico's CPI on Thursday July 9: market positioning will begin to form today, and any sign of core inflation above 4% would be a positive driver for the peso via carry. Second, the US CPI on July 14: that print will determine whether the Fed has room to turn more dovish in the second half of the year, or whether 3.63% in Fed Funds is the floor for now. A hotter-than-expected US CPI could push the DXY — currently at 100.94 — above 102 and put more decisive pressure on the peso.

Gold at 4,176 (+0.50%) and WTI at 69.30 (+1.09%) signal that risk appetite in commodities remains firm, consistent with a Risk On Score of 64/100, CONSTRUCTIVE status. We are not in risk-off mode, but neither in full euphoria — it's the ideal environment for the carry trade to work with contained volatility. The base case remains positive for the peso in the near term, with the important caveat that US yields are the primary risk factor to monitor.

— See you tomorrow for Wednesday's view.