Peso goes ahead. Forecast as of 26.04.2023

2023.04.26 2023.04.26
Peso goes ahead. Forecast as of 26.04.2023logo

USDMXN bears go ahead, encouraged by the US economic strength, as it is the main trading partner of Mexico, the effective management of inflation, the balance of foreign trade, and the growth in oil prices. However, the situation is changing in April. Let us discuss the Forex outlook and make up a trading plan.

Monthly fundamental Mexican peso forecast

Not all central banks wait for the Fed to take some steps. Some regulators complete the monetary restrictions cycles earlier. In theory, an end to the monetary tightening cycle should weaken the local currency. However, Black Rock suggests that emerging markets’ regulators can deviate from the Fed’s route and avert the depreciation of their currencies. This is evidenced by the growth of the EM currency index following the weakening of the US dollar. At the same time, the largest asset manager in the world advises investors to pay attention to currencies such as the Mexican peso due to effective inflation management policies, a balanced current account, and a low debt-to-GDP ratio.

Dynamics of MSCI of emerging markets currencies and US dollar

Source: Bloomberg.

The peso performs perfectly in 2023 due to Banxico’s aggressive monetary tightening, the strength of the economy of the main trading partner, the USA, and rising oil prices. It claims to be the best Forex performer, second only to the Hungarian forint. Since the beginning of the monetary restriction cycle in June 2021, the main interest rate has increased by 725 basis points compared to +475 basis-point interest rate growth in the USA. The widening yield spread between Mexican and US bonds has encouraged the USDMXN bears. However, in April, the central bank began to signal a pause in the rate hiking process.

Banxico’s governor, Victoria Rodríguez, said that the regulator would consider keeping the cost of borrowing at the same level of 11.25% in May amid slowing inflation. The growth rate of consumer prices in the first half of April fell from 6.58% to 6.24%, slightly faster than Bloomberg experts expected. The core inflation slowed down from 8.03% to 7.75%. As a result, the chances of a 25-basis-point rate hike in May fell from 60%. After the Banxico Governor’s speech before Parliament, they dropped even lower.

Dynamics of Mexico’s inflation and Banxico’s interest rate

Source: Bloomberg.

According to Goldman Sachs, Victoria Rodríguez’s comments mean that it is convenient for the central bank to maintain a tight monetary policy. Wells Fargo thinks it will continue monetary tightening. According to Banxico forecasts, inflation will decrease to 4.8% by the end of 2023, the figure of 5% is included in the draft budget of Mexico, and the consensus estimate of Bloomberg experts is 5.13%.

Monthly USDMXN trading plan

In my opinion, the issue of hiking the interest rate or keeping it at the same level remains open. At the same time, the completion of the Fed’s monetary tightening suggests that the USDMXN downtrend should continue. It is quite possible that strong data on durable goods orders, GDP, and inflation in the US will lead to a temporary strengthening of the US dollar. However, I would sell the pair on the correction. The previously announced level of 17.5, as well as the level of 17.1, are medium-term targets for shorts.

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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