USD/MXN: Likely to trade between 19.85 and 20.20 in the coming weeks – Rabobank

Analysts at Rabobank see the USD/MXN pair trading between 19.85 to 20.20 in the coming weeks before returning north of 20.50 near half of the year. They expect the Mexican peso to play catch up with the rest of Latin American currencies. 

Key Quotes: 

“The Mexican peso has been the main underperformer within the LatAm region since the beginning of this year. One reason for this is MXN’s role as a risk proxy for EM and LatAm in general. If you’re reading this you are likely aware that MXN stands out in EM as the only full deliverable, convertible, and 24-hour tradeable LatAm currency.”

Providing further support for LatAm currencies has been the process of EM portfolios rebalancing away from CEE into LatAm. The recovery in risk appetite also shone a light on rate differentials which have supported LatAm currencies

“We expect MXN to play catch up with the rest of LatAm, but we would exercise caution. We don’t expect much further downside for USD/MXN and MXN is unlikely to surpass gains seen in the rest of the region in the short term. USD/MXN has broken down through the 20 handle and is currently trading in the price congestion region of 19.85 to 19.95. Below that, it is largely thin air down to 19.50 but as always with USD/MXN its risk proxy status leaves it vulnerable to a surge higher on any bout of risk aversion. And of course, the Russia/Ukraine war leaves markets facing a significant risk of such safe haven flows.”

“We have long cited a primary trading range of 20.50 to 21.50 this year for USD/MXN and so far the pair has averaged 20.5 but recent developments suggest that we are more likely to see the pair trade 19.85 to 20.20 in the coming weeks before returning north of 20.50 as we move towards the middle of the year. As always, however, USD/MXN takes the stairs down and the elevator up. Broad-based risk appetite will remain the key variable to watch for USD/MXN direction in the coming weeks and months.”