The USD has moved up on the MXN and there could be far more upside to come. Our view of the fundamentals, sentiment, and key technical levels to watch below…
The Interest Rate Outlook
Emerging markets generally are soft after U.S. Federal Reserve Chair Jerome Powell’s confirmation that a half-point increase in interest rates in May was “on the table.”
In fact, we could see an even bigger rate hike with Nomura expecting the Fed to hike by 75 bps. The emerging market currencies are heavily reliant on USD funding and not only are rates rising but the Fed is also going to be taking dollars out of the financial system by reducing its balance sheet.
Will Mexico tighten rates to take the pressure off the peso?
“Banxico normally targets USD/MXN stability through keeping a 600bp policy spread of the fed funds rate. The Mexican policy rate is now 6.50% and the market indeed prices it at 9.50% next year on the back of a 300bp Fed tightening cycle. Failure of Banxico to follow the Fed could see the MXN coming under pressure.” (ING)
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If they do keep pace with the Fed the economy will slow up anyway and the economy which is heavily export orientated will suffer from a slow up in the US and also the slow up in the global economy.
Slowing Global Growth Bearish the MXN
The emerging market currencies tend to weaken when the global economy contracts and we can see this happening now via leading indicators such as global PMI’s and the slow-up will get worse.
In fact, we face the prospect of a global recession.
Petroleos Mexicanos
The company is due to pay some 1 billion euros ($1 billion) to redeem a 2015 bond, two sources told Reuters, despite President Andres Manuel Lopez Obrador’s assurance that his government would pay debts due up until 2024.
Pemex has struggled with declining crude production and in 2020 lost its coveted investment-grade debt rating. The state-run firm’s debt problems have hit Mexico’s sovereign credit rating over the years.
Technical Analysis
On the daily chart, a breakout above resistance is bullish and could target the 22.00 level which is also monthly resistance.
If we break lower we would expect the 22.00 level to provide support – A close below this level would negate our bullish stance.
On the monthly chart, we have resistance at 22.00 but if we were to get a big move to risk-off we could overshoot up to the 24.00 level.
