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Morgan Stanley Expect USDMXN To Trade In 17.20-18.00 Near-Term Range

MEXICO
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  • Morgan Stanley believe MXN should trade in a range of 17.20-18.00 in the near term, as some structural uncertainty ahead requires higher risk premia. All else equal, they have a hard time seeing MXN consolidate below 17.00, as the results of the election point to a shift in the broader investment narrative for Mexico via an added layer of policy uncertainty. They think that headline risk remains quite elevated, not just idiosyncratically, but also as the US election approaches.
    • MS’ options-based indicator suggests that MXN longs have cleaned up meaningfully over the past few days, and they believe that investor sentiment has shifted from bullish to neutral following the election.
    • Going forward, they think that local policy uncertainty could make MXN more sensitive to US election-related headlines. They think that investors would feel more comfortable with a Banxico/US monetary policy spread of roughly 500bp at most, implying less room for decoupling from a financial stability standpoint than previously assumed.
    • Overall, MS believe that fading MXN's recent underperformance would be more of a 1-2 month trade, rather than a medium-term structural long once again. They prefer to remain more cautious for now and MS are in no rush to re-engage with MXN longs.
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  • Morgan Stanley believe MXN should trade in a range of 17.20-18.00 in the near term, as some structural uncertainty ahead requires higher risk premia. All else equal, they have a hard time seeing MXN consolidate below 17.00, as the results of the election point to a shift in the broader investment narrative for Mexico via an added layer of policy uncertainty. They think that headline risk remains quite elevated, not just idiosyncratically, but also as the US election approaches.
    • MS’ options-based indicator suggests that MXN longs have cleaned up meaningfully over the past few days, and they believe that investor sentiment has shifted from bullish to neutral following the election.
    • Going forward, they think that local policy uncertainty could make MXN more sensitive to US election-related headlines. They think that investors would feel more comfortable with a Banxico/US monetary policy spread of roughly 500bp at most, implying less room for decoupling from a financial stability standpoint than previously assumed.
    • Overall, MS believe that fading MXN's recent underperformance would be more of a 1-2 month trade, rather than a medium-term structural long once again. They prefer to remain more cautious for now and MS are in no rush to re-engage with MXN longs.