USD/MXN: A buy on dips with a target at 21.50 – CIBC

Analysts at CIBC maintain an upward bias on the USD/MXN pair. They see the pair trading at 21.00 by the end of the second quarter and at 21.5 by the end of the third. 

Key Quotes: 

“Banxico’s decisive end to the monetary policy easing cycle, with a cautious and uncertain bias to the inflation risk balance should provide support for the MXN in the immediate term. The CB has left the door open to reassess this neutral stance if inflation further deviates from the CB forecast and inflation expectations increase. This will be the most significant test for the CB as the new composition of the board of directors suggests keeping monetary policy accommodative, and favouring growth due to the lack of fiscal stimulus.”

“In line with the latest central bank announcement, and the return of a cautious tone in the statement, we expect Banxico to remain on hold for most of 2021, and to start a gradual tightening cycle in Q4.”

“We maintain our USD/MXN upward bias and suggest buying USD/MXN dips to 20.30 with a 21.50 target and a 19.70 stop. Five factors support this view. 1) increasing US yields – reflation story; 2) the market is already pricing an aggressive hiking cycle in the next year, far from our expectations of an on hold Banxico for most of the year; 3) lack of fiscal support to growth; 4) continuous fiscal aid to Pemex, and concerns about further credit ratings downgrades; and, 5) June mid-term elections are likely to reignite concerns of populist measures and government intervention.”

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