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

In 2015, the Mexican peso was caught in a severe downward trend, thanks to the prospects of a quick normalization of US monetary policy. However, it appears this might take some time as the US data came out rather disappointed and given that the US Fed is now being vigilant. Furthermore, the Mexican central bank has hiked its benchmark interest rate sharply. However, the Mexican peso has not gained from the USD weakness.

The Mexican peso, in 2016, has been one of the underperforming currencies in Latin America and admittedly in the wider emerging market space, said Commerzbank in a research note. This is mainly because of the investors’ preference to short the peso as a means of showing a negative view on emerging market as a while because of low transaction costs and a relatively cheap cost of carry, noted Commerzbank.

USD/MXN is expected to remain volatile in the near-to medium-term. This is partially because of uncertainty ahead of the US elections. Other than the likelihood of additional rate hikes by the US Fed, downside risks for the Mexican peso is in the broader outlook for emerging markets and in another downward correction of oil prices, according to Commerzbank.

“Despite the interest rate advantage over the US and other emerging markets, we rather expect the peso to move sideways overall,” added Commerzbank.