We expect risk-premia (rp) to start building up in MXN as soon as 2018 begins. Some preventive hedging might already
be taking place as the vol curve has steepened while the forward vol structure shows higher skew and kurtosis. We see additional room for rp to increase in the months to come.

We argue that leadingup to next year’s elections, MXN’s behavior might more closely resemble that of GBP ahead of the Brexit referendum than its own before the US presidential election. We expect the market to start actively trading politics as soon as we enter 1Q18.

We do expect USDMXN to trend down for the rest of the year before MXN depreciates as soon as we enter 2018. We believe that risk-premia will increase in MXN spot during the firsthalf of 2018 because of 1) The enhanced momentumof antiestablishment parties during the local elections,2) The uncertainty regarding the potential economic policies that could be implemented after the
elections,3) The tightness of the race and 4) A higher subjective margin of error due to whathappened in Brexit and the US election.

The vol market seems to be already pricing some of this. The volatility curve has steepened in the last few months while 6M6M risk reversals and kurtosis show increased premia. We interpret this as precautionary hedging activity that might continue increasing in the months to come.

It is still very unclear what the end game will be for MXN due to the political risk that it may face next year. We think MXN outperformance could come to an end as soon as we begin 2018 due to the fact that risk-premia needs to increase to accommodate the uncertainty related to the possibility of less orthodox economic policy in the years to come.