Mexican peso likely to remain sensitive to external drivers triggering sudden shifts in USD

Trading dynamics in Mexico’s local currency market is being shaped mainly by the monetary cycle in the US that is dictated by the Federal Reserve. The quest for yield by long-term foreign investors along with an upbeat boost from remittances continues to be supportive for the Mexican peso, noted Scotiabank in a research report.

However, the peso would continue to be susceptible to external drivers bringing about sudden movements in the USD’s value vis-à-vis its peer currencies such as the increase in policy uncertainty in Europe, that is the Brexit vote and health of Italy’s banking sector, and possibly disturbing evens in the US.

Meanwhile, Mexico continues to gain from inflows of foreign portfolio investment. A renewed appetite for Mexico’s long-term debt securities by foreign institutional investors with a long term focus has been seen despite a moderation in foreign investors’ exposure to the short end of the local-currency bond yield curve, stated Scotiabank.

However, Mexico’s sovereign debt rating continues to be on a “negative” credit watch due to the continuous fiscal strain linked with the accumulation of public debt and the severe drop in crude oil prices impacting PEMEX’s fiscal contribution.