From hero to zero

In our forecasts at the beginning of the month, we highlighted that the outcome of the June 2nd elections would be key for MXN’s prospects over both the tactical and medium-term. As a result, we placed our forecasts under conditional review as we awaited more visibility on the electoral outcome. With our worst case scenario now realised, we have revised up our USDMXN forecasts to reflect the increased risk premia embedded in Mexican assets and the heightened level of asset volatility delivered by the constitutional reform process and the direction of overall policy. We suspect the latter will leave markets cautious on MXN as it erodes the peso’s risk-adjusted returns.

As such, we suspect that the high levels of the MXN seen over the last few months that earned it the nickname “super peso” are now unachievable. However, the strong state of economic fundamentals, Banxico’s commitment to the interest rate path, which is likely reinforced by the recent turbulence in MXN, and recent news of continued fiscal consolidation in turn validate a relatively optimistic approach to the MXN on a tactical horizon. Over the medium term, however, we are structurally more bearish on the peso’s fortunes, noting that the US elections pose another layer of uncertainty.

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Author: 

María Marcos, FX Market Analyst

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