The Mexican Peso will continue to strengthen as long as market volatility remains low, according to analysts at Rabobank.
“..as long as volatility is declining, MXN will rally. While suppression of volatility is a tenuous assumption, it is our base case for the next couple of weeks,” says Rabobank.
Relatively high interest rates in Mexico – the Banxico overnight interest rate is 11.00% – support inflows from the carry trade in which traders borrow in a currency with low interest rates and use the loan to buy a currency with higher interest rates like the Mexican Peso.
“We expect interest rate differentials to remain favorable,” says Rabobank.
In the case of Mexican Peso’s most highly traded pair USD/MXN, the rate differential remains Peso-favorable.
“US-MX 2yr rate differentials have widened 33bp in April and will continue to act supportive for MXN over the course of May.”
The Banxico is likely to keep interest rates unchanged at its May meeting based on recent Banxico commentary.
“We have changed our Banxico forecast to reflect a pause at the May 9 meeting. This follows Deputy Governor Jonathan Heath’s interview on April 20, when he noted that he is ‘leaning towards a pause in May, and we can see how data evolves by June,’ which he highlighted is ‘likely’ to be a unanimous decision,” says Rabobank.
The high number of long positions amongst non-commercial speculators in the MXN futures market as well as a seasonal effect, which suggests May is a favorable month for MXN, are further drivers of upside, according to the bank
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