USD/MXN likely to remain volatile in near-to-medium term

The USD/MXN currency pair appears set to remain volatile in the near-to medium term, with heightened global uncertainty after the Brexit vote weighing on the peso, said Commerzbank in a research report. The uncertainty is also expected to impact market expectations about the central bank’s further moves in the tightening cycle that the Fed began in December.

Last year, the Mexican peso was stuck in a severe downward trend. Similar to several other emerging market nations, this was mainly because of the prospects of a swift normalization of US monetary policy.

This also signifies the weak spots in February and June. The Mexican peso seems to be preferred in EM currency positions due to high liquidity, low cost of carry and low transaction costs. Given that the UK voted for Brexit and the resultant uncertainty, the Bank of Mexico hiked its key rate further, showing its resolve to offset the depreciation pressure on the currency.

If the market were to speculate additional rate moves again, as in February or June, the Mexican peso should come under increasing pressure. Also, additional risks on the downside for peso lie with the wider outlook for China and emerging markets or a near-term decline in oil prices. Therefore, the USD/MXN pair might move higher towards 19.50 in the short-term, according to Commerzbank.

The peso would be underpinned by a credible monetary policy and strong fundamental data in the medium term. The MXN, therefore, might appreciate moderately in the years ahead, consistent with the steady interest rate advantage over the US and other EM, added Commerzbank.