Cautious optimism on Mexico's economic outlook was echoed by investors' views on the MXN. Most expect USD-MXN to end the year in a 15.00-15.25 range, although views diverge on the potential for the high (15.6679) to be breached in the near term.
Some investors expect a stronger USD to overwhelm Mexico's more positive domestic narrative in the next three months. Conversely, a number of investors believe an increasingly interventionist Banxico could slow a move higher in USD-MXN.
Banxico recently announced measures aimed at slowing MXN depreciation, suggesting that the central bank seeks to moderate volatility. These measures include a daily USD 52mn auction (announced on 11 March) and a USD 200mn auction at a rate equivalent to the previous day's USD fixing plus 1.5% if the MXN depreciates by this amount (December 2014).
"We are more bullish on USD-MXN in the near term than investors, although we share a more positive medium-term outlook. We recently revised our short-term FX weighting from Neutral to Underweight to reflect lower oil prices, the government's low approval ratings, and the impact of a stronger USD", says Standard Chartered.
Steps towards a more interventionist approach bear watching, although a dramatic regime shift from the laissez-faire currency management approach adopted after the 1994-95 crisis is unlikely.
"We have an Overweight medium-term FX weighting on the MXN, with recent domestic economic weakness expected to give way to a broad-based recovery amid strengthening external demand. In this context, we expect USD-MXN to rally to 15.70 in Q2, falling back to 15.25 at year-end", added Standard Chartered in a report on Tuesday.
