USD/MXN to trade with a 20 handle over the coming weeks – Rabobank

Banxico will announce its latest rate decision today and both analysts and the market are divided as to the most likely outcome. Economists at Rabobank expect the Bank to leave rates on hold at 4.00%. Meanwhile, USD/MXN has repriced in line with the broader move in EM FX and the pair is likely to trade with a 20 handle over the coming weeks. 

Key quotes

“We expect the Bank to hold rates at 4.00% which is in line with 12 other analysts out of a total of 23 surveyed by Bloomberg.”

“If US rates reverse some of their recent increase and 2023 rate hikes are priced out then that should provide some support for EM FX and MXN further down the line thus softening the pace of depreciation.”

“We just laid out the US rates rationale behind the recent sell-off in MXN and why the story behind that holds true in the short term but may fade as the year progresses, we did also note that the focus on domestic fundamentals may increase and this could weigh on MXN given the weakness in the underlying economy. These conflicting forces combined support our forecast for USD/MXN to primarily trade within a 20-21 range over the course of this year.”

“Volatility is likely to remain higher than pre-covid levels however, and greater uncertainty translates to wider ranges meaning we could see breaks in both directions to the 19 and 22 handles despite these not being our base case targets.”