The dovish shift is not something that only the Fed can do. Emerging market central banks were the first to initiate a monetary tightening cycle. They may be the first to start cutting rates. Discussing forex outlook, USDMXN trading plan.
Weekly Mexican Peso Fundamentals Forecast
Why will the Mexican peso be so successful in 2023? As current officials think, it’s due to prudent domestic policies, austerity, and government promises to avoid new debt. Shall we?Or is it due to high interest rates, increased remittances and proximity to a strong US economy? This may explain the next success. USDMXN bears. Ultimately, the fact that the Mexican peso fell to a seven-year low and hit the target of 17.5 pesos set in February speaks in favor of the Mexican peso.
Peso is the top performer in forex. It has gained more than 10% against the US dollar since the beginning of the year, outperforming Eastern European currencies and the Brazilian real. Bansico was among the first to tighten monetary policy, raising interest rates by 725 basis points since the beginning of the policy cycle. At the same time, inflation has eased from September’s peak of 8.7% to 6.25% in April, pushing up real bond yields. This will contribute to capital inflows into Mexico, weighing on USDMXN.
May’s rise in the peso was due to a decline in US recession risk. Having a strong neighbor nearby is good news for exporters and local currencies, especially if the United Nations raises its forecast for US GDP growth in 2023 from 0.4% in January to 1.1% today. As long as China doesn’t do much and Europe weakens, the Latin American currency group, whose main market is the US, will thrive. However, it is difficult to predict whether the USDMXN bears will continue their success in the second half of 2023.
Market conditions are constantly changing. Investors, who used to focus on inflation and monetary tightening, now worry about slowing GDP growth, recession and dovish growth. Therefore, betting on falling interest rates can be profitable. Brazilian and Mexican regulators are among the first central banks to begin easing monetary policy.
Brazil and Mexico interest rate forecasts
sauce: Bloomberg.
Twelve of 15 Bloomberg experts expect Bansico to keep its key rate unchanged at 11.25% at its May 18 meeting. Three of them are betting on a rate hike of 25 basis points. Investor attention has turned to signals that rates are plateauing or in a dovish shift. History shows that in previous cycles, emerging market central banks started easing monetary policy an average of four months after the cap was reached. In theory, this should undermine the status of the national currency.
every week USDMXN trading plan
Deutsche Bank has called the peso one of the world’s most expensive currencies and does not expect the peso’s success to increase further in the second half of 2023. RBC BlueBay believes a hard landing of the US economy, including defaults, will put pressure on. Latin American currencies depreciate. In my opinion the risks are different. Peso bulls should worry less about a US economic recession than about a soft landing and a reduced likelihood of a Fed dovish shift. These factors are USDMXN correction up. Signals to buy this pair could be Banxico’s dovish tone and a break of the 17.54 resistance.
Real time mode price chart for USDMXN
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