USD/MXN: Path of least resistance remains higher - Rabobank

Analysts at Rabobank note that Banxico’s Exchange Commission announced a new FX hedging regime on 21st February which led MXN to return briefly to its teenage years as the 20 handle broke but this is more Teenage Kicks than Benjamin Button.

Key Quotes

“Momentum remains to the downside but we see this as providing better levels for longs rather than a complete change in stance. This announcement, coupled with widening interest rate differentials relative to the rest of LatAm provide reasons to be bullish MXN.”

“That said, event risk remains elevated and Trump has the potential to unwind this move in 140 characters or less. As such, we view the recent move as merely offering better levels for USD/MXN longs.”

“It is too early to write off USD/MXN trading back below 20 completely but to our mind, the path of least resistance remains higher for USD/MXN. Indeed, this new program may help to dampen volatility and ease some of the pressure on MXN but it does not change the underlying driver that pushed MXN above 20, namely fears over the potential impact on Mexico of President Trump’s policies.”

“On this front, we still have little clarity in terms of what will actually be announced and what will come to fruition. In itself, this obviously makes it very difficult to assess the impact on Mexico but it is fair to say that any announcement that damages Mexico’s current terms of trade with the US will act as a drag on growth and will weigh on MXN initially. The move below 20.13 has nullified the continuation triangle target of 23.74.”

“Going forward, we think the recent move serves to make USD/MXN longs more attractive. The 100 dma at 20.29 should turn from support to resistance before strong support at 20.8/9 which marks the confluence of the 50 dma and a line of strong resistance dating back to Q4 2016. Above there, the all-time high of 22.0385 comes into play.”