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Analysts Remain Cautious On MXN Trajectory

MEXICO
  • *Banorte believe Banxico will no longer cut rates at its next meeting on June 27th. Moreover, we think the gradual approach will extend for the rest of the year, now expecting the rate at 10.50% by December’s close (previous: 10.00%). MXN implied volatilities have been pressured upwards along the curve, more strongly in short term maturities, resulting in an inverted slope. Banorte expect MXN to trade between 17.90 and 19.10 this week.
  • *BBVA: The reform agenda still seems likely to be addressed imminently, thus maintaining some risk pressure and keeping the USDMXN range quite wide. Volatility is likely to be fed by fiscal concerns before the US election and related issues come into play, potentially impeding a rebuilding of carry positions and turning the previous resistances of USDMXN17.20-17.60 into new supports. At the upper end, the next resistance would be the 6 October high of 18.48, followed by Monday’s high of 18.65. If cleared, the next level will be the 19 handle and the March 2023 high of 19.23.
  • *CIBC expect increasing local risks, especially those related to potential changes in the Judiciary, to tame expectations of rate cuts by Banxico this month and into Q3. This should provide strong incentives to consider fading the upward USD/MXN move as it approaches the 18.50 mark.
  • *Commerzbank believe that such far-reaching changes should not be tackled so quickly. They share the concerns of many commentators and analysts who see parts of the reform as critical to Mexico's rule of law and checks and balances. The peso will have a hard time recovering from the losses of the past few days. Commerz would not be surprised to see the pair test higher levels in the coming hours and days. After such statements, it is hard to imagine that politicians will try to allay the market's concerns.
  • *ING: Confirmation that judicial reform will be on the agenda will be seen as negative news, and North American investors could take the peso lower again at their open today. ING have been bullish on the peso for a long time but would remain cautious now. Additionally, the very popular long MXN/JPY carry trade may face further challenges this Friday when the Bank of Japan meets to set policy.
  • *Itaú’s end-of-year currency forecast is at 17.9 pesos to the U.S. dollar. However, their call has an upside risk dependent on the persistence of uncertainty from the new political landscape.
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