Mexican peso loses its shine. Forecast as of 12.06.2024 | LiteFinance
When a political party is willing to enact radical reforms, any currency can quickly lose its appeal, as happened with the Mexican peso. Let’s discuss this topic and make a trading plan for USDMXN.
Quarterly fundamental Mexican peso forecast
There is only one step from the sublime to the ridiculous. The Mexican peso was a top performer among the world’s major currencies in 2023 and was off to a great start in 2024. In the run-up to the June elections, asset managers increased a net long position in the peso to its peak since 2022, citing its effectiveness in the carry trade, the proximity of a surprisingly strong US economy, and the relocation of Chinese factories to Latin America. However, Claudia Sheinbaum’s unequivocal victory changed everything. Speculators have been getting rid of the super peso so quickly that their long trades in the week to June 4 were at their lowest level since December.
The Morena party received about two-thirds of the seats in the lower house of Congress and slightly fewer in the Senate. Investors are worried that, reveling in its power, the party may pursue more radical legislative changes than Andres Manuel Lopez Obrador has proposed. His intention to reduce the number of supreme judges from 11 to 9, to hold their snap elections, to revise the electoral law, and to dissolve independent bodies seriously frighten investors. Such reforms aim to reduce control of power, which could lead to an unstable political landscape and even a downgrade of Mexico’s credit rating. Against this backdrop, the peso’s volatility has skyrocketed.
Mexican peso volatility
Source: Bloomberg.
The markets were counting on Claudia Sheinbaum to distance herself from the incumbent, whose term expires in October. What is happening, however, is more like an extension of Andres Manuel Lopez Obrador’s 6-year term in the worst-case scenario. Investors are drawing parallels with Venezuela, where Hugo Chavez’s regime came to power in 1999. This led to an exodus of investment, soaring inflation, and poverty that caused people to flee the country.
Morgan Stanley, which said before the election that USDMXN could soar to 19.2, now thinks that the forecast is more than modest. The bank wants to buy the pair if it falls below 18, citing the Mexican peso as the main release valve for political noise. Mexico’s Banco Base sees the pair at 20 as the peso’s volatility will remain elevated for a long time.
Two other blows to the Mexican currency could be the slowdown in the US economy and Donald Trump coming to power. The Republican has promised to increase import tariffs for all countries by 10% and levies on Chinese cars assembled in Mexico by 200%. Washington is certain to renegotiate the terms of the free trade agreement signed with Ottawa and Mexico City in 2018. The trade turnover of the US neighboring countries is about $1.5 trillion, so it is no wonder they are nervous.
US’s key trading partners
Source: Bloomberg.
Quarterly USDMXN trading plan
The Mexican peso has lost its “super” prefix. Expectations of major changes in Mexican legislation in September-October and the presidential elections in the US in November will keep USDMXN bears at bay. The pair may exceed the 20 mark within three months. Meanwhile, analysts recommend buying the peso.
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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