USD/MXN: Peso to appreciate in the near-term before reversing back lower – MUFG

The Mexican peso continued its appreciation path in May due to positive combinations on the local political and economic scenarios. While economists at MUFG Bank expect the MXN to continue appreciating in the near-term, this strength is set to fade for a number of risks.

Improving outlook for the coming quarters

“As for the pandemic, the average daily cases continue to decline and are at their lowest levels since May 2020, so pressure on the health system remained contained for now and confirmed the scope for the gradual reopening of the economy.”

“The positive perspective for GDP could support the government coalition in the mid-term elections scheduled to 6th June, although higher inflation might be a problem for Morena party in these elections. According to the latest polls, Morena is leading gubernatorial races with a very comfortable advantage. So all those political and economic factors suggest there is room for further MXN appreciation in the short-run.”

“We think this appreciation might be reverted due to a set of risks ahead. Firstly, the share of population vaccinated is still relatively low (still less than 10% were fully vaccinated as of 24th May) and there is uncertainty over vaccine supply in the coming months.”

“US economic growth brings some concerns over higher inflation that is embedded in US Treasury yields, and latest FOMC minutes suggest the possibility of reduction of asset purchases either in the 4Q21 or early 2022.”

“There remains the risk of interventionist policies not only in the energy sector. AMLO made several criticisms during May about Banxico Governor Alejandro Diaz de Leon, suggesting he will be replaced when his mandate expires in December, which adds some risk to Central Bank autonomy.”