USD/MXN: Path of least resistance is higher for the pair - Rabobank

Christian Lawrence, Senior Market Strategist at Rabobank, notes that as expected, Banxico chose to raise rates in the aftermath of the Fed’s first 25bp rate hike in a year and only its second in the past 10 years and what did come as a surprise to most was the size of Banxico’s hike.

Key Quotes

“Consensus was for a 25bp move but in the event, 50bp was forthcoming. Despite this, USD/MXN merely managed to unwind the preBanxico move seen earlier in the week and that was not to last with the pair now back up in the 20.40/50 region. Of course, this isn’t the first time we have highlighted MXN’s lack of sensitivity to interest rates with the widening MXNUSD interest rate spread post-US election failing to provide much support for MXN with other drivers dominating. That is not to say rates don’t matter. They most certainly do. But when looking at shorter time frames, risk aversion dominates.”

“Banxico itself re-iterated the need to pay attention to Mexican rates relative to the US and we see Banxico as still firmly in Fed watch-mode. Our forecast for Fed rates is more dovish than both the Fed and the market. We see just one rate hike next year and not until December while the latest Fed DOT plot shows a median expectation of three 25bp rate hikes in 2017 and the market is pricing in around 60bp of tightening by the end of 2017.”

“The USD/MXN forecast for the end of next year now stands at 21.21, up from 20.89 last month but below our expectation of a 23 handle. We maintain the view that USD/MXN is unlikely to become a teenager again in the coming months and we still see the path of least resistance as higher for the pair. The pace of depreciation will of course be very much dependent on developments north of the border.”

“In terms of the technical picture, USD/MXN has moved back into ‘neutral’ territory according to our Rabo momentum model after last week showing a “bullish” signal. To our mind, with USD/MXN currently standing around 20.40 we see strong support on the downside at the 20 handle and see little room for MXN appreciation. 20.87 is likely to offer resistance ahead of the all-time high of 21.3897. A look at positioning data show speculators are still net short MXN although not at the levels seen earlier in the year. It is also worth noting that we have a 500mn option positioning expiring on the 22nd at 20.55.”