Mexican peso is tired. Forecast as of 17.05.2023

2023.05.17 2023.05.17
Mexican peso is tired. Forecast as of 17.05.2023logo

A dovish shift can be made not only by the Fed. Emerging markets’ central banks were the first to initiate cycles of monetary tightening. They might be the first to start cutting rates. Let us discuss the Forex outlook and make up a USDMXN trading plan.

Weekly fundamental Mexican peso forecast

Why is the Mexican peso so successful in 2023? Is it due to wise domestic policies, fiscal austerity, and the government’s promise to avoid new debt, as the current authorities think? Or is it because of high rates, rising remittances, and the country’s proximity to a strong US economy? This could explain the success of USDMXN bears. After all, the pair’s drop to a seven-year low and the achievement of the target set back in February at 17.5 speaks in favor of the Mexican peso.

Peso is a top performer in Forex. It has risen more than 10% against the US dollar since the beginning of the year and outperforms the group of Eastern European currencies and the Brazilian real. Banxico was one of the first to tighten monetary policy, raising rates by 725 basis points since the start of the cycle. At the same time, the slowdown in inflation from the September peak of 8.7% to April’s 6.25% increases the real yield of bonds. This contributes to capital inflow to Mexico and presses down the USDMXN.

The peso gains in May are due to lower recession risks in the US. A strong neighbor nearby is good news for exporters and the local currency, especially when the UN raises the forecast for US GDP growth in 2023 from January’s 0.4% to the current 1.1%. As long as China does not succeed much and Europe weakens, the group of Latin American currencies, for which the US is the main market, will prosper. However, it is hard to predict if the USDMXN bears will continue their success in the second half of 2023.

Market conditions are constantly changing. Whereas investors were focused on inflation and monetary tightening earlier, now, they are worried about slowdowns in GDP growth, recessions, and dovish shifts. So betting on lower interest rates could yield profits. Among the first central banks that should start monetary easing are the regulators of Brazil and Mexico.

Expectations for interest rates in Brazil and Mexico


Source: Bloomberg.

Twelve out of fifteen Bloomberg experts predict that Banxico will leave the main interest rate at 11.25% at its meeting on May 18; three are betting on a rate hike by 25 basis points. The focus of investors’ attention is shifting to signals that the interest rate remains on a plateau or a dovish shift. History shows that in previous cycles, EM central banks began to ease monetary policy on average four months after the ceiling was reached. In theory, this should undermine the position of the national currency.

Weekly USDMXN trading plan

Deutsche Bank calls the peso one of the most expensive currencies in the world and does not expect it to build on its success in the second half of 2023. RBC BlueBay believes that a hard landing in the US economy, including due to default, will press down the currencies of Latin America. In my opinion, the risks are different. The peso bulls should worry about a soft landing instead of a recession in the US economy and lower chances of the Fed’s dovish shift. These factors can trigger a USDMXN correction up. The signal to buy the pair could be Banxico’s dovish tone and the breakout of the resistance at 17.54.

Price chart of USDMXN in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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