Peso breaks the trend. Forecast as of 13.10.2023

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The best-performing currency in the past three years is losing previous gains. Export problems and the end of monetary restriction cycles and hedging programs push the USDMXN quotes down. Let’s discuss it and make a trading plan.

Monthly fundamental forecast for Mexican peso

No matter how often the President of Mexico said the era of the super-peso would continue, recent events indicate that it is over. Investors see an inflation slowdown, reduced currency hedging operations, and the end of the tourist boom as the reason for buying the USDMXN. The pair easily reached the targets of 18 and 18.3 outlined in the previous article, and the current retracement offers the buyer new opportunities.

A strong currency is one of the indicators of a current government’s popularity and reflects the national economy’s power. The peso has strengthened 12.5% against the USD during Andrés Manuel López Obrador’s time in office. The Mexican currency has been the top performer among the 30 most liquid currencies tracked by Bloomberg since the beginning of the year and in the past three years. However, everything comes to an end.

Mexican peso versus USD

  

Source: Bloomberg.

One of the main advantages of the super peso is its impact on inflation, which slowed down to 4.45%, the lowest since February 2021. However, shortcomings have also started showing themselves over time. A strong currency harms exports, which is demonstrated by the tourism sector.

The number of foreign travelers arriving to Mexico at the height of summer has dropped for the first time since March 2021. Their expenses were reduced by 7.% in August. Conversely, the expenses of the locals traveling abroad grew by almost 30%. Their number grew by 26% to over 600 thousand.

Mexican tourism

Source: Bloomberg.

Tourism is a good example, but its scales are incomparable to the total export volume, which is also affected by a strong peso. Unsurprisingly, the Banxico decided to phase out currency hedging operations meant to pare the peso’s volatility. At the end of August, the Central Bank had around $7.5 billion of outstanding positions in those instruments. Further reduction will push the USDMXN quotes higher.

So, however hard the president may try to reassure the population, and however loudly Banxico may talk about some room left for further tightening, the markets don’t believe them. The current monetary restriction pause looks more like a stop. At the same time, the derivatives expect a key rate cut from its current level of 11.25% in February or March 2024.

Monthly trading plan for the USDMXN

Still, the peso could face headwinds from abroad. The US bond yield’s drastic rally amid the Fed’s intention to keep the funds rate on a plateau for a long time puts pressure on US stock indexes and reduces global risk appetite. That badly affects emerging market currencies. Consequently, the USDMXN is likely to continue rising. Use the current retracement to buy the pair with a target at 18.5 and 18.8.

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.

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