Analysts at Rabobank expect the market to start pricing in more of an election premium and our bias remains for an upside move in USD/MXN. According to them, MXN remains the most attractive carry currency when adjusting for liquidity and volatility
Key Quotes:
“USD/MXN remains range-bound in an 18.30-18.98 range since the sell-off from 19.90 high at the end of last year. That said, the bulk of trading has really been in the 18.45-18.95 area. This is the longest period of range-trading for USD/MXN since Q3 of last year when the 17.50-18 region dominated price action. Domestic data continue to sour with domestic demand, investment and exports all slowing but carry attractiveness continues to drive demand for MXN.”
“We noted above that interest rate differentials have shown a close relationship with USD/MXN price action of late. Although correlation does not imply causation, the relationship between rates and FX is well established and it is not unfair to infer the ability of rates to drive the currency. Given our view that much of the support for MXN has come from carry trade demand, it is no surprise that rates are proving key for price action. Higher rates and lower vol are the nectar of carry trades and we have seen both of these dynamics in Mexico.”
“We expect volatility to start picking up as we head closer to the election and we see room for rates to dip given our non-consensus view that Banxico may remain on hold next month. The market is around 65% priced for a rate hike at the time of writing. If both of these come to fruition then it is easy to paint a picture where MXN falls relative to USD. This is particularly the case given that Rabobank is forecasting USD strength in the coming months. Our MXN Market Model which points to USD/MXN rallying but remaining below 19 on a one month basis and that is reflected in our forecasts below. That said, beyond one month we see room for USD/MXN to move north of 19 and test the 20 handle again.”
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