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USDMXN bears had concerns that the Bank of Japan would strengthen the yen and the Bank of Mexico would weaken the peso. However, when they were not confirmed, carry traders got down to business. Let’s discuss the Forex outlook and make up a trading plan.
Fundamental Mexican peso forecast for six months
The Mexican peso could become the best currency for the second year. In 2023, MXN became the best among Forex’s most liquid monetary units. That year, the Mexican currency strengthened 13% against the US dollar thanks to high Banxico rates, the country’s proximity to the US economy, and carry trade operations. In 2024, USDMXN bears’ trump cards continue to work. Therefore, the pair sank by 2.2% in the first quarter.
Peso buyers had concerns that after the Bank of Japan and Bank of Mexico meetings in March, MXN would cease to be a leader. Spread trading using the high-yielding peso and yen as funding currencies returned 44% in the last 12 months. Not surprisingly, asset managers increased MXN net long trades to their highest levels in a year.
Carry trade efficiency
Source: Bloomberg.
Dynamics of asset managers’ MXN net longs
Source: Bloomberg.
The Bank of Japan’s rejection of negative rates scared USDMXN bears. Carry trade requires low volatility and efficiency of funding currencies. The BoJ’s start of monetary normalization could change everything. However, instead of strengthening against the US dollar, the yen weakened. The unexpected cut in the SNB key rate seriously weakened the second most popular funding currency, the franc. Both events contributed to the MXN’s strengthening.
It is worth noting that Banxico’s Governor, Victoria Rodriguez, and her colleagues were the last of the major Latin American regulators to cut the rate from 11.25% to 11%. However, the accompanying statement and the 4 to 1 vote indicate that Banxico’s officials will not do this at every subsequent meeting.
Dynamics of Mexican inflation and Banxico rates
Source: Bloomberg.
When the Ministry of Finance forecasts that GDP will expand by 2.5-3.5% in 2024 and 2-3% in 2025, there is a high risk that inflation will accelerate. The government expects prices to rise by 3.8% this year. This indicates they are within the target range of 3% +/-1% and allows Banxico officials to be cautious.
Victoria Rodriguez said the central bank would move forward step by step. Pauses in the monetary expansion cycle look very likely, which allows carry traders to stick to their strategies, and USDMXN bears not to worry.
USDMXN trading plan for six months
The peso’s problems will begin in the fall, when investors will focus on the US presidential elections and possible win of protectionist Donald Trump. Mexico may be among the first to feel the effects, given its soaring trade surplus with the United States. I assume, USDMXN will decline to 16.2 by July followed by a rise to 17 by October. Hold short trades entered at 17.01 and periodically add up to them.
Price chart of USDMXN in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
