MXN deprecation in line with its EM peers

The beginning of the US monetary policy normalization cycle has been exceptionally well telegraphed, hence market stress is unlikely in Mexico. 

US Fed has been guiding markets towards higher rates in the near future, compared with the Taper Tantrum while markets have been expecting policy normalization to happen during the past few years. 

Currently, there is a 75% chance priced in by Fed fund futures market, for a hike in December. The curve for 2016 implies nearly three more hikes.

Mexican currency is far from cheap and its devaluation is consistent with its other Emerging market peers. The currency depreciated almost 12% ytd against USD, but in multilateral and real terms, MXN weakened by 5.5%.

With this it comes belwo the BEER model, as it was almost 5% costlier during third quarter of 2014. Adding to it, MXN ranks as 22nd cheapest currency in risk-adjusted terms out of 34.

"There are no signs of stress in the FX market. Despite recent MXN weakness being comparable (in % terms) to other episodes in which financial stress was high, financial conditions are quite different this time and the move has happened in an orderly fashion", says Barclays in a research note.

USD/MXN in annualized terms has moved "only" 20% since mid-2014, compared with a 115% move during the Great Recession. Furthermore, 1m implied ATM volatility is trading at 10.5%, while in the crisis it reached more than 50% (max: 70%). 

It stands at its 10-year average and well below the levels of 2008 (the Lehman crisis) and 2011 (the European crisis).