Peso is back in the game. Forecast as of 30.03.2023

The USDMXN surge of over 7% in of March gave rise to the feeling that the downtrend was broken. However, in fact, the banking system in Mexico is much less exposed to risks than in the US or the euro area. Let us discuss the Forex outlook and make up a trading plan.

Monthly fundamental Mexican peso forecast

In March, the peso was riding a roller coaster. After the Mexican became the second-best performer among 23 emerging market currencies tracked by Bloomberg in 2022, behind the Russian ruble, thanks to a record $58 billion in US remittances and Banxico’s aggressive monetary tightening, it was expected to continue strengthening. In 2023, the peso had been performing perfectly, but the banking crisis sent it down. The USDMXN was 7.3% up, and the downtrend seemed to have reversed up. However, every rise is followed by a drop.

In fact, high bond yields, after Banxico’s interest rate has increased from 4% to 11% for 14 consecutive meetings, have made the peso an ideal carry trade currency. Carry traders were making good money on a wide 600-625 spread between the Mexican central bank’s base rate and the Fed’s federal funds rate. However, it all made sense in a low-volatility environment. As peso volatility soared to 17.2, the highest in 2.5 years, the USDMXN bulls went ahead.

The stabilization of the banking system, for which the absence of news is good news, has returned everything to normal. Investors remembered the benefits of the Mexican currency, which include not only profitable carry trading and transfers from abroad but also serious direct investments from the USA that want to place new production in Mexico, the strength of the Mexican economy, and exports. Indeed, with the proximity of the USA, Mexican GDP grew by 4.4% in January, which is significantly higher than the consensus forecast of 3% by Bloomberg experts. Despite the slowdown in inflation from 7.48% at the end of February to 7.12% in the first half of March, the indicator remains at an elevated level, which suggests that Banxico should raise its interest rate by 25 basis points in early April.

One of the important advantages of the peso is the insignificant role of the banking system in Mexico’s GDP. After the 1994 tequila crisis, lending institutions were sold to foreigners. Thus, the crisis will be less painful for Mexico than for the US or the eurozone.

To sum up, the Mexican peso should go up. In late March, the USDMXN bears have almost regained their lost positions. Investors are looking forward to the Banxico meeting, which is likely to return the gap between its interest rate and the federal funds rate to 625 basis points again. This will allow carry traders to return to their operations and strengthen the peso.

Monthly USDMXN trading plan

As expected, the corrective move in USDMXN was a great opportunity to sell the pair at favourable prices. The target of 17.5 remains relevant. I recommend entering shorts on the corrections.

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