FxWirePro: Stay Short AUD/MXN owing to oil prices and RBA

Driving Forces:

RBA has more reasons for further monetary policy easing. The RBA assumes inflation expectations will return to their long-term average, whereas we see a risk that they stay low for longer, helping cement low actual inflation. There has been a widespread decline in inflation expectations.

The further unwinding of the political risk premium and short positioning for the MXN. More focus on AUD fundamentals.

Stabilization of oil price to crawl higher over the next quarters as base metals to underperform the energy sector.

FX markets have tunnel vision. Fed Chair Yellen’s speech at Jackson Hole will be the key catalyst for a move, but even then it is not clear that broad ranges are set to break for the AUD. Downside risks remain, but a move below USD0.74 remains a big ask.

Trade Mechanism: Entry - 14.0270, 1y target: 12.50, stop: 14.70, Carry: approx.+2.9% p.a.

Risk Profiling: How much would USD/MXN rise if Donald Trump were to win the US presidency? And how much would AUD/USD fall? Certainly, the Trump risk is more fully priced into the MXN than the AUD, and this would limit the extent of the loss from his winning. Current pricing seems to overstate the risk (which we estimate at 25%).