USD/MXN: A less supportive environment for the Mexican peso next year – ING
|Gustavo Rangel, Chief Economist at ING for Latin America points out that the outperformance of the Mexican peso seen during the current year will be hard to sustain in 2020.
Key Quotes:
“Mexico’s high-carry was the crucial anchor to its stellar FX performance in 2019, but that advantage should shrink in 2020 as Banxico’s rate-cutting cycle deepens.”
“In the very near term, high interest rates should remain an effective stabilising factor for the MXN, which should keep the USDMXN trading close to 19.5. A steady pace of 25bp cuts suggests, however, that high rates should gradually become a less effective FX anchor, while the risk of a more frontloaded monetary easing cycle has increased, adding greater uncertainty to the outlook for the currency in the longer-term.”
“Our base case is for Banxico to cut the policy rate an additional 150bp, with the policy rate ending 2020 at 6.0%. But poor activity data could increase pressure on the bank to bring monetary policy more firmly into neutral territory (possibly closer to 5.5%), while a change in the board’s composition at the end of 2020 could set the stage for a more substantial change in policy bias.”
“Our view is that Mexico’s inferior GDP growth outlook, lingering risk of credit rating downgrades, among other factors, suggest that the scope for MXN outperformance should become increasingly challenging throughout 2020. In fact, our expectation is that the USD/MXN gradually depreciates towards 20.0 by the end of 2020.”
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