USD/MXN likely to trade at higher level in short term

Last year, the Mexican peso was on a downward trend. This was mainly because of the speculations of a rapid normalization of the US Fed’s monetary policy.

This situation was similar to several other emerging nations. The downtrend of the peso continued in May 2016 after rebounding for a short period of time. The peso declined in spite of rising oil prices. To certain extent, this was just a reflection of markets re-pricing the US dollar exchange rates because of hawkish statements from several FOMC speakers, said Commerzbank in a research report.

Moreover, the Mexican peso showed its traditional higher beta to emerging markets. High liquidity, cheaper cost of carry and cheap transaction costs together made the peso the preferred proxy for conveying an opinion on emerging markets in a broader sense, noted Commerzbank. But in spite of a rising likelihood of the Fed raising rates by July this year, markets have not entirely priced this in yet. If this continues, the USD/MXN pair will thus trade at higher levels.

Also, additional risks on the downside to the Mexican peso are from the broader outlook of emerging markets and China or a renewed decline of oil prices in near term. Therefore, the pair’s movement towards 19.50 is possible in the short term, according to Commerzbank. The peso is likely to be underpinned by a credible monetary policy and strong fundamental data in the medium term.