USD/MXN to move higher on Mexican presidential election - Rabobank
|Analysts from Rabobank maintain the forecast that USD/MXN will trade around the 20 handle in June. They see July elections gaining attention.
Key Quotes:
“Since the end of last year we have suggested that substantial MXN weakness would emerge as campaigning for the Presidential election got under way. We have also been highlighting that support for MXN over recent months largely came from international carry trade players who would be quick to exit positions when volatility rose.”
“USD/MXN touched a high of 19.9091 on December 26th but soon returned to the 18.50-19.00 range for most of February and March before breaking lower in the latter part of the March, touching a low of 17.94 on 17th April. That session triggered a bullish divergence reversal signal as the relative strength index (RSI) formed a higher high while USD/MXN price action formed a lower low.”
“The bullish ‘divergence’ signal on 17th April was actually accompanied by a conflicting bearish signal with the 50 and 200 day moving averages forming a ‘death cross’, pointing to a downside move. In the event, this bullish ‘divergence’ signal timed the reversal in USD/MXN perfectly and the pair has been rallying ever since.”
“The USD/MXN volatility term structure has been pricing in some election premium for most of this year but recently we saw 3mth implied at-the-moment volatility overlap the July 1st election date which led to a near 4ppt jump in vols from just below 12 to a high of 15.75%.”
“Domestically, the 2018 July 1st Presidential election has been a talking point for many years and as we stood at the end of 2017, we saw a potent cocktail of event risk in Mexico with NAFTA negotiations and election campaigning running concurrently in H1 2018. At that time, however, we were clear that to our mind the international markets would not focus on the election until the likes of the Wall Street Journal and Financial Time started covering it in earnest. This, partly a reflection of MXN’s role as a LatAm and EM FX proxy which often means that exogenous, rather than domestic drivers, play the primary role in dictating MXN price action. This was exacerbated by attractive carry that offset any risk that was in the immediate horizon. Indeed, this helped to explain the divergence between options and spot and led to our MXN mantra that we cited above. Elections are now in focus and attention is only likely to increase.”
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