USD/MXN: Short opportunities to dissipate moving into fourth quarter – CIBC

Mexican assets have continued to perform well over the last month despite concerns about growth and the spread of the COVID-19 pandemic throughout the country. USD/MXN has lost the 22.00 level and though a dip to 21.50 is not out of the cards, Luis Hurtado from CIBC Capital Markets expects short USD/MXN opportunities to dissipate into the fourth quarter and forecast the pair trading at 22 by year-end.

Key quotes

“The disconnect between the growth picture and the performance of the peso is evident, with two factors supporting it since the start of May. First, the high correlation of the MXN to global equities, and implicitly, global central bank liquidity, combined with vaccine hopes have provided a positive backdrop to the MXN. Second, Banxico’s cautious easing cycle, reinforced by recent upside surprises in inflation, has also provided relief as central banks in the region swiftly cut rates to historical lows due to the pandemic.”

“Although we do not discount USD/MXN revisiting 21.5, we expect short USD/MXN opportunities to dissipate as we move into Q4. First, we expect volatility to pick up as we approach the US election cycle, a scenario difficult to escape given the peso’s high correlation to US equities. Second, we expect the market to favour countries emerging from recession in better fiscal shape. Budget discussions and announcements during the second half of Q3 should also add to the increase in volatility as investors assess the possibility of further downgrades.”