News & analysis

We believe the MXN should continue to gradually strengthen against both the USD and EUR, although less so against the latter as the single currency should also extend its current rally against the dollar in the following months.

Respective to the USD (USDMXN is the main reference), it is important to highlight that the forecast is extremely uncertain in the upcoming weeks as per the unpredictable outcome of the US election. General wisdom indicates that a Democratic win would push the peso up, as the risks of a tense relationship with the Trump administration would be removed. Yet, the outcome of US elections is anybody´s guess at the moment, which leads us to bet on an increased volatility over the following weeks regardless. On a medium-to-longer term basis, I´ve argued the case that the peso should pivot back towards its (softer) fundamental level as a result of: i) broad dollar weakness; ii) limited downside risks to an already weak peso ahead of the economic recovery; and ii) fairly attractive carry in the context of a less concerned Fed on inflation and a still cautious Banxico.

All these factors should also drive the MXN price action against the euro. Relative to the single currency, however, this narrative is somehow weaker as the euro sustains its broad-basis gains on its own.

An unprecedented policy response to the pandemic along with a relatively more successful Covid management and a faster economic recovery, are the underlying factors feeding the euro on a fundamental level. There are a number of potential risks to an extended euro rally in general, ECB members “talking down the euro” to begin with. All in all, we believe the euro is set for a positive cycle in the year ahead, limiting the scope for a solid MXN appreciation. The chart below tells this story better, as you can see the diverting paths the MXN has shown against both peers since May –crucially, the time at which the European joint recovery fund was hinted at by Merkel and Macron.

 

MXN percentage variation against the EUR and USD as of the 1-year benchmark

 

Author: Olivia Alvarez Mendez, FX Market Analyst

 

 

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