USD/MXN: To move in ranges and then toward 20 - Rabobank

On Thursday, the Bank of Mexico will meet. It is expected to keep rates unchanged at 8.25%.  Analysts at Rabobank, expect Banxico to leave rates at 8.25% and consider there is the risk of one more 25bp hike this cycle, their base case is for the next move to be easing in 2020. They see USD/MXN to range-trade, punctuated by short term moves higher driven by volatility events but they expect a more sustained weakening of MXN in the second half of the year as the domestic environment sours further.

Key Quotes: 

“We expect USD/MXN to primarily trade within the 18.96-19.20 range, punctuated by short-lived moves higher driven by broad-based spikes in volatility before carry players push the pair back down into the range again. An example of such a move would be if the US and China do not reach a trade agreement by March 1st, which we suspect will be the case, and the spike in global volatility we would expect as a result.”

“It is not just headwinds north of the border weighing on the outlook for Mexico. Indeed, as regular readers will be more than aware by our oft-repeated mantra “stay long MXN and collect the carry but protect yourself”, we remain of the view that fundamentals justify a higher exchange rate but carry provides significant support for MXN which we still view as the most attractive carry currency in the world when adjusting for volatility and liquidity.”

“We see room for more sustained depreciation driven by the domestic side that should push USD/MXN north of 20 heading into year-end. At that juncture, it will be difficult for Banxico to raise rates given domestic and external data are likely to have turned for the worse and recession talk may be the key focal point. In terms of the drivers behind a deteriorating outlook, we would highlight the impact of slowing activity in the US and an impeding recession, slowing domestic activity driven by consumption and a dearth of new investment discouraged by heightened uncertainty around domestic policy, slowing global trade, the potential for policy mistakes to trigger outflows from foreign investors, and issues surrounding the state-owned energy entity - Pemex. Indeed, the new administration has already demonstrated a lack of experience in shoring up confidence amongst both the domestic business community and international investors - there are many potential
pitfalls ahead that could lead to sustained outflows.”