Newsletter · 2026-10-02 · Ashutosh Agarwal

Mexico's Peso Gives Back Its Whole Year as EM Carry Trades Crack - EM FX Weekly - Week of October 2, 2026

EM FX Weekly for the week of October 2, 2026: State Street's FX trading head said the Mexican peso's year-to-date gain is fully unwound and the Colombian peso is nearly 10% off its highs, but sees no systemic crisis; State Street named 165 as the top for dollar-yen, Jeff Snider explained why India, Japan and the Philippines are losing despite defending their currencies, the Aussie broke below 70 cents, and RBN put Mexico's reliance on US diesel at about 40%.

EM FX Weekly

Week of October 2, 2026: Mexico's Peso Gives Back Its Whole Year as EM Carry Trades Crack

For most of this year, the emerging-market currency trade was simple. You borrowed in a cheap currency like the yen, bought a high-yielding one like the Mexican peso or the Colombian peso, and got paid to wait.

On Tuesday we asked whether the pause in that trade would turn into a rush for the exits. This week State Street's head of FX trading answered with numbers. The Mexican peso's entire gain for the year against the dollar "has been completely unwound." The dollar has risen almost 6% against the peso, and almost 10% against the Colombian peso from its lows.

His view is that this is not a crisis, just a popular trade getting cheaper to own and less worth the risk. Elsewhere the pressure is building in plainer ways. The Australian dollar slipped below 70 US cents. The yen is heading back toward 160. One well-known dollar-funding analyst spent an episode explaining why India, Japan and the Philippines are all spending money to defend their currencies and still losing ground.

TL;DR

The carry unwind now has numbers attached. On State Street's Street Signals, FX chief Chris Pizzotti said the peso's year-to-date gain against the dollar is gone, dollar-peso is up almost 6%, and dollar-Colombian peso is almost 10% off its lows. Mexico's interest-rate advantage over the US has shrunk to about 2.5 percentage points, "near historical, if not historical lows."
State Street doesn't see a systemic crisis. "We don't see any stretched positions across the EM space that we have major concerns about." But if volatility picks up, "you'll start to see people start to unwind a little bit more."
Its yen call is a bold one: 165 is the top, sub-150 possible by year-end, 140 over time. The reason is that Washington now wants a stronger yen too, and the Bank of Japan is still hiking.
Energy importers are paying to defend their currencies and still losing. On Eurodollar University, Jeff Snider walked through India's $140 billion inflow campaign, which still left the rupee heading back toward record lows. He also covered Japan's roughly ¥27 trillion of intervention this year and the Philippine peso's record low below 62.
The Aussie broke below 70 cents, to 69.48. The RBA hiked to 4.6% on a 9-0 vote, but Governor Bullock sounded softer than expected. Then Australian inflation came in below forecasts. The Aussie was at 72 cents on September 8.
US inflation surprised on the soft side, but long-term yields kept rising. Core PCE (the Fed's preferred inflation gauge) was 0.2% for the month and 3.0% for the year after methodology revisions. Market odds of an October Fed hike fell to about 37%. The 10-year Treasury touched 5.30% intraday and the 30-year 5.64%.
The diesel export ban is turning into a fight over Mexico. RBN Energy says about 40% of Mexico's diesel demand is met by US imports. That is well above the 25% figure J.P. Morgan gave last week. Rory Johnston expects rationed export licenses rather than an outright ban.

What's new

State Street: the peso's year is gone, but this isn't 2008

The most useful currency podcast of the week was State Street's Street Signals episode "Bytes, Bonds and the Yen: The Big Picture In FX" (October 1). Host Tim Graf interviewed Chris Pizzotti, State Street's global head of FX sales and trading. He is someone who sees the actual flows, not a pundit.

His starting point was that the carry trade has been "a lot of investors being short yen and buying emerging markets like, you know, Mexico or Colombia." That has "performed really, really well up until the last couple weeks." Then he gave the damage:

Colombian peso: "up 17 or 18% year to date until, you know, the past couple weeks." Now "Dollar Colombia is almost 10% off the lows."
Mexican peso: "the year-to-date outperformance of the peso against the dollar has been completely unwound and we've seen an almost 6% move higher in dollar Mex."
Mexico's carry cushion: "the spread's only about 250 basis points now, which is near historical, if not historical lows." In plain English, Mexico pays only about 2.5 percentage points more than the US now. That is a thin reward for taking emerging-market risk.

His question is the one every carry investor is now asking: "is it worth the extra risk now, especially when equities are at all-time highs? You know, you have pressure now in US rates to the top side." His answer was that it's "natural for some of these currencies that have performed really well so far year to date that some of those positions get unwound. And you've seen that happen."

He was just as clear that this isn't a meltdown. Mexico stands out as an overweight in speculative positioning data. But across EM, "we really don't see extended positioning," and "I don't think it's going to be a major systemic crisis." The trigger to watch is volatility, meaning how much currencies are swinging day to day. "It's all about volatility... Naturally, if that picks up, then you'll start to see people start to unwind a little bit more."

Graf, who runs macro strategy for Europe at State Street, added a point worth noting. Swings in EM currencies have fallen to levels similar to developed-market currencies in some cases. But he doesn't think that makes these economies as safe as they look. Looking at "the pricing of skew in dollar Mex or dollar Brazil," he sees "big dislocations that indicate to you that vol of vol still has potential to be pretty high." Skew is how much more traders pay to insure against a big move in one direction than the other. That is why "out-of-the-money options look still pretty attractive and tail risk is still... there."

Why it matters: last week MUFG warned that Mexico and Chile were first in line if carry got sold. This week a big FX dealer confirmed that it has started, at least in Mexico and Colombia. It also said positioning across the rest of EM isn't stretched enough to turn this into a crash.

State Street on the yen: Washington changes the math

Same episode. Pizzotti has a good track record here. Two years ago on the same show he named ¥140 per dollar as the floor for dollar-yen, and the low was 140.62. His call now:

"I think 165 would be top of the range for me moving forward."
"You'll get significant conversation and rhetoric from the Bank of Japan and the US if we get back above 160, you know, even overnight."
A move "below 150 even by the end of this year, and then naturally, you know, get back down towards 140. Over time."

What's different this time, he says, is "the US involvement and how outspoken the Fed has been about the level of dollar-yen and, you know, wanting to drive dollar-yen lower." That comes alongside a Bank of Japan that keeps raising rates. He pointed to the rate checks in January and "the joint intervention in July" as "very meaningful" signals. The next leg lower comes "if we do get any shift in rate expectations to the downside in the US."

He also said the yen story has stayed mostly separate from the wider dollar. "It has, you know, been a pretty Japan idiosyncratic story and really hasn't fed through to a lot of the other currencies in the G10 space."

Eurodollar University: defending a currency with borrowed dollars

On Eurodollar University ("BREAKING: India Just Intervened to Save Its Currency," September 26), Jeff Snider argued that currencies this year are moving on a simple question. "Who needs dollars? Who's receiving dollars? And who is willing or able to supply them?" Interest-rate gaps matter less. This is one commentator's framework, not a bank's house view, but the details are worth knowing.

India. The Reserve Bank of India subsidized dollar deposits from Indians living abroad, letting some banks pay "dollar deposit rates as high as 7.5%." It worked on paper. "More than $140 billion" flowed in, and surplus cash in Indian banks hit a record 11 trillion rupees (about $115 billion). The RBI then had to drain that cash with "at least $10 billion of sell-buy currency swaps," and it has an estimated "$106.7 billion short dollar forward position." That is a promise to deliver dollars later. "And after all that, the rupee still moved back toward its record low."

His explanation is oil. "If it's $60 per barrel, it needs $60 million. At 95 bucks, the same shipment requires 95 million." That is a 58% bigger dollar bill for the same oil. His verdict: "India is not manufacturing dollars. It is borrowing them from overseas savers at a huge premium."

Japan. The Bank of Japan raised rates to 1.25%, "the highest since 1995," and yet the yen is "approaching 160 per dollar again." In one recent round, Japan's Ministry of Finance spent "roughly 15.4 trillion yen or more than $96 billion... buying yen in less than a month," and "around 27 trillion yen during the year." He also noted the latest BoJ hike drew two dissents. He expects Japan to intervene again above 160 ("you should probably count on it"). But he thinks it will only produce "yet another violent short-term rally" because intervention "works by supplying dollars from official reserves" and fades "when the official buying stops."

The Philippines and Indonesia. The Philippine peso "recently fell to a record low below 62" even though its central bank has been raising rates. The trade deficit widened to almost $6 billion, and the Asian Development Bank cut its 2026 growth forecast to 3.3% (S&P to 2.9%). Indonesia's current account deficit "widened to a record in the second quarter as higher oil prices increased import costs," and fuel subsidies add fiscal pressure.

China, the exception. The yuan "continues to rise" even though "Chinese interest rates are now lower relative to U.S. dollar rates than at any point in modern history," and the economy faces a property bust and weak spending. The reason is that "China generates dollars commercially." Exporters keep bringing dollars home and converting them. "Energy importers must repeatedly enter the market to buy dollars. Chinese exporters repeatedly enter the market with dollars to sell."

Why it matters: this is the cleanest explanation we've heard for why rate hikes in Manila, Jakarta and Tokyo aren't saving their currencies. For EM Asia, the oil price is the exchange-rate policy. It also explains why the yuan is the calm anchor of the region while the rupee and peso slide.

The Aussie breaks 70 cents

NAB's Morning Call covered the RBA decision in two episodes.

On RBA back on the narrow path (September 29, Australian Wednesday), NAB's Taylor Nugent confirmed the hike to 4.6% was "a unanimous decision, so the vote was 9-0." The softness came from Governor Michelle Bullock in the press conference. "She noted that the board discussed a hold versus a hike," "noted that policy was restrictive," and said "the hope is that the kind of four increases that we've seen this year would be enough." Nugent read it as the RBA "trying to get away with doing the bare minimum." NAB's base case is a hold from here, with the risk "still very much skewed towards a follow up increase at that November meeting." Host Phil Dobbie noted the Aussie was "below 70 US cents now for the first time in a while," with 10-year Treasuries at 5.26%.

By It's All About Inflation (September 30, Australian Thursday), NAB's Skye Masters had the Aussie at 69.48. "Back on the 8th of September, it was $0.72." It was the hardest-hit major currency. Australian inflation came in softer than expected. The trimmed mean (the RBA's preferred core measure) rose 0.2% on the month against 0.3% expected, and headline inflation was 4.0% against 4.1%. That "eased off expectations that the RBA might do back-to-back rate hikes."

The Property Couch's live RBA episode (September 29) put the problem simply. The Aussie "spiked up as you would expect" after the hike and then "come back quite significantly," because although Australia now has "the second highest rate in the developed world behind Iceland," "most central banks around the world now are actively doing or thinking about raising rates." On Equity Mates (September 30), the hosts noted markets expect one more hike to 4.85% early next year. ANZ is the most hawkish of the big four banks and expects a November move.

Why it matters: the Aussie is the market's favorite liquid proxy for Asian growth and risk appetite. Losing 2.5 cents in three weeks while the RBA was hiking tells you rate gaps aren't the driver right now. The driver is the global bond selloff and a dollar that keeps being bought.

US data: softer inflation, but long-term yields keep rising

Masters laid out the US numbers on NAB's It's All About Inflation:

Core PCE rose 0.2% in August against 0.3% expected. Methodology revisions "took around 36 basis points off the annual rate," leaving it at 3.0%. The three-month annualized pace is now 2%, down from 2.6%.
ADP private payrolls were 90,000 against 75,000 expected. Q2 GDP was revised up from 1.5% to 2.2%.
Market odds of an October Fed hike fell to about 37%. A day earlier, after dovish comments from New York Fed President John Williams, NAB said odds of a hike at the next meeting had dropped to "closer to 50% priced from 70%."
Long-term yields still rose. The 10-year hit 5.30% intraday and the 30-year 5.64%. Over September, the 10-year rose 55 basis points (0.55 percentage points) and the 2-year 54. Expectations for the Fed funds rate by the middle of next year have moved from 4.20% to 4.80%.

J.P. Morgan's economists were less relaxed. On the Global Data Pod inflation monitor (October 1), US economist Abiel Reinhart said core PCE "has been at or just slightly above 3% for almost every month this year," and "our view is that the Fed will continue to hike, that they're going to have another hike in December." Global economist Nora Szentivanyi said "global inflation momentum is now rebounding," with headline inflation heading back toward "a 4.5% annualized pace, maybe even a little bit higher." Core goods inflation outside the US is running at 2.6% annualized, "the strongest pace we've had since like 2023," against a pre-pandemic norm of about 0.6%. She also flagged food inflation turning higher, with El Niño hitting "some of the EM regions" hardest.

On Bloomberg Surveillance (September 30), Wolfe Research's Stephanie Roth said the Fed will "hike at least one more time, maybe twice." She also argued the move in yields above 5% is "a combination of technical factors and oil," which Fed hikes don't really solve.

Why it matters: for EM carry, the front end and the long end are pulling in opposite directions. Softer inflation lowers the odds of near-term Fed hikes, which would normally help carry. But 30-year yields at 5.64% keep pushing up the cost of everything and keep the dollar bid. Today's US jobs report is the next test.

The diesel ban: Mexico's exposure is bigger than we thought

Last week J.P. Morgan said Mexico now buys only 25% of its diesel from the US, down from 60% in 2023. This week a different source painted a scarier picture. On the RBN Energy Blogcast ("Leap of Faith," September 28), RBN's analysts said:

Mexico was "the number one destination for U.S. distillate in H1 2026 with a 15.7% share," and "about 40% of Mexican diesel demand is supplied via U.S. imports."
"Chile, Ecuador, Peru, Brazil, Panama, Guatemala and Argentina made up most of the top 10" destinations. Latin America "would likely face not only increasing diesel prices, but also physical shortages of the fuel."
A McKinsey study of a 2022 proposal estimated that removing 1.4 million barrels a day of US products "could require a roughly $25 per barrel increase in international product prices." Today, "the adjustment would likely be even more pronounced."
US Gulf Coast diesel margins "surpassed $100 per barrel for the first time in August."

The two figures likely measure different things (share of total demand versus share of imports, and different time periods). But the gap matters for anyone short dollar-peso on the view that Mexico is safe from a ban.

Rory Johnston of Commodity Context gave the global view on Facts vs Feelings (Ep. 207, September 30). Between Hormuz, the Red Sea and Ukrainian drone strikes on Russian refineries, "we've lost roughly around 2 million barrels a day of diesel to the market." US exports have risen "about 50 percent to around a million and a half barrels a day." If the US stopped exporting, "you could see $150, $200 barrel diesel cracks" outside the US. His prediction: "very likely you won't see a full straight up ban. You will see some kind of pro rata rationing of export licenses," as Nixon did in 1973-74. He also said oil flows through Hormuz are back to about 13.5 million barrels a day against a pre-war 21 million. He's "more of a Hormuz half empty kind of guy," with crude "just below 110."

On Bloomberg Surveillance, Bank of America's Francisco Blanch noted that the Financial Times reports "crisis talks" in the administration and that officials have briefed allies including the UK. Russia has already "banned diesel into the end of October." On Hormuz, "the blockade is working," but shipping costs above "$20+ a barrel" and two aircraft carrier groups make it "a very expensive process." He also flagged that Chinese onshore crude inventories have been falling "2 to 3 million barrels a day" for several weeks, which may push Beijing toward a deal.

Why it matters: if Johnston is right about rationing, the worst case for Chile, Peru and Mexico gets less likely. But the RBN numbers say Mexico would be hit much harder than J.P. Morgan suggested last week. That arrives just as the peso's carry cushion has shrunk to its thinnest in years.

The debate

Bear camp: the unwind has started, and the dollar shortage is real. This side had the stronger evidence this week. State Street's own figures show the two favorite carry currencies, the Mexican and Colombian pesos, giving back most or all of their 2026 gains, and Mexico's carry cushion is at historic lows. Jeff Snider's case on Eurodollar University goes further. Energy importers like India, the Philippines and Indonesia need more dollars every time oil rises, "while the global financial system's becoming even less willing to supply them." Intervention, rate hikes and deposit subsidies only "temporarily rent a stronger exchange rate." Add a 30-year Treasury at 5.64%, J.P. Morgan's call for a December Fed hike, global goods inflation at its hottest since 2023, and an Aussie that fell even as the RBA hiked. The common thread is that higher local rates aren't protecting currencies this month.

Bull camp: a shakeout, not a crisis. The same State Street interview gives the counterweight. "We don't see any stretched positions across the EM space." Pizzotti expects "volatility... to start to creep up," but "I don't think it's going to be a major systemic crisis." US inflation came in softer than expected, and October Fed hike odds fell to about 37%. That is the kind of rates "stabilization" J.P. Morgan said last week would let carry catch up. The yuan is rising on export dollars, and China's PMIs showed services in expansion, with "fiscal stimulus... starting to gain traction" according to NAB. Oil through Hormuz has recovered to about 13.5 million barrels a day. If State Street is right that the yen tops out at 165 and heads below 150, that would mean a slow and orderly unwind of yen-funded carry, not a sudden one.

Where it lands: both camps agree the swing factor is volatility. If currencies keep swinging harder, the unwind spreads beyond Mexico and Colombia. If today's jobs report and next week's data let long-term Treasury yields settle, the damage probably stays limited to the most crowded trades.

The trades in play

Mexican peso: the carry is thin and the diesel risk is bigger. State Street puts Mexico's rate advantage at about 250 basis points, "near historical, if not historical lows," with dollar-peso up almost 6%. RBN's 40% US-diesel dependence figure makes MXN more exposed to a ban than last week's J.P. Morgan numbers implied. The bull case is that positioning has already been cut and the peso has given back its year. The next data points are the White House's decision on diesel exports and today's US payrolls.
Use options rather than spot for EM tails. Tim Graf argues skew in dollar-peso and dollar-real points to "big dislocations," and "out-of-the-money options look still pretty attractive." With realized volatility low but the risk of sudden jumps high, paying for protection (or for upside) through options looks better value than taking the full spot position.
Dollar-yen: fade the move toward 160-165. Pizzotti sees "165 would be top of the range," US-Japan pushback "if we get back above 160," and below 150 by year-end. Snider agrees intervention is likely above 160 but warns the rallies fade. A falling dollar-yen is also the classic trigger for yen-funded carry unwinds, so this is a hedge for EM carry books too.
Asian energy importers: rupee, Philippine peso, rupiah. Snider's case is that rate hikes can't offset the oil-driven dollar demand. The next data points are Brent (around $102-103 this week on NAB) and whether India's central bank keeps adding to its forward dollar commitments.
Aussie dollar below 70 cents. NAB's base case is that the RBA is done, and inflation came in soft. ANZ still expects November. Until the global bond selloff calms down, the Aussie is trading as a risk gauge, not on Australian interest rates.

Read-throughs

Broad dollar: Snider has the dollar index "back above 101," helped by a weaker euro, which is about 58% of the index. Pizzotti puts the dollar index's recent move at "2 or 3%." He expects the dollar "to remain firm" because the US consumer "is still in a very good place" compared with other economies.
EM local and dollar bonds (EMLC, EMB): the US 10-year rose 55 basis points in September and the 30-year 40, per NAB. With EM currencies now giving back gains as well, local-currency bond funds are losing on both the bond and the currency.
EWW and Mexican assets: the peso's year-to-date gain is gone, and the diesel question looks more serious for Mexico than it did a week ago.
EWZ / FLBR: on InvestTalk (September 30), the host preferred the Franklin FTSE Brazil ETF (FLBR, 0.19% fee) over EWZ (0.59%) for Brazil exposure, calling Brazil "a resource rich country" and giving it "a thumbs up." That is a retail pundit view. Graf also named dollar-real skew as a place where tail risk is mispriced.
EWY and Korea: Pizzotti said Korea's stock market swings have dominated FX flows this year. The Kospi was the world's best market last year and "doubled" again in the first part of this year. Flows were driven largely by "two names, SK Hynix and Samsung," with "a lot of levered ETFs" adding to volatility. That is why he expects currency volatility to "creep up specifically in certain markets."
INDA: India's currency defense is costly. A $106.7 billion short dollar forward position, per Snider, is a future claim on reserves if oil stays high.
Brent and diesel: Brent was around $102.60 on Wednesday and $103.50 on Thursday, per NAB. Johnston has crude "just below 110" earlier in the week. US crude inventories are at their lowest in 12 years, per NAB's Masters.
Copper: the metals podcasts were uniformly bullish. On The KE Report (October 1), Nick Hodge had copper at "all-time highs or at least close to them" on AI data-center demand and supply disruptions at Escondida. That is a quiet support for the Chilean and Peruvian pesos against the diesel hit.
AUD as a China proxy: China's PMIs improved and Beijing added property and infrastructure support, per NAB. The Aussie fell anyway. It is trading on global yields and the dollar, not on China.
EUR/USD and CE3: European inflation is rising while US inflation cools. Germany came in at 3.3%, and the eurozone consensus is 3.7%, with Pantheon expecting 3.9%. Markets now price 57 basis points of ECB tightening, per NAB. On The Bitcoin Layer (September 30), Nik Bhatia flagged a "massive blowout" in French yields versus German ones, with "pressure lower on the euro." He thinks Europe "might be stepping in to defend its bond market and letting its currency go." That is one commentator's view, but a weaker euro driven by bond stress is bad news for the zloty, forint and koruna, which usually follow the euro.

What changed

Carry went from "pausing" to "unwinding" in the two most popular names. Last week J.P. Morgan said carry was "taking a breather" and MUFG named MXN and CLP as vulnerable. This week State Street said the peso's 2026 gain is fully gone and the Colombian peso is nearly 10% off its best levels.
Mexico's diesel exposure got bigger, not smaller. J.P. Morgan's 25% figure from last week now sits against RBN's estimate that about 40% of Mexican diesel demand comes from US imports.
The diesel ban is shifting toward rationing. Johnston expects pro-rata export licenses rather than a full ban. The FT reports crisis talks and allied briefings.
The Aussie broke 70 cents. It went from 70.2 before the RBA to 69.48 after a unanimous hike to 4.6%, a softer-sounding governor, and soft local inflation.
US inflation surprised lower, and October Fed hike odds fell. Market odds dropped from about 70% to about 37% in two days. Long-term yields went higher anyway, with the 30-year at 5.64%.
The yen debate got a specific target. State Street named 165 as the top, below 150 by year-end and 140 over time, pointing to US involvement and continued BoJ hikes.
Asia's energy importers came into focus. After weeks of near-silence on the rupee, India's costly defense of its currency and the Philippine peso's record low below 62 got their first detailed discussion.