Peso needs to cool down. Forecast as of 06.06.2024 | LiteFinance
The USDMXN pair’s volatility spike could remove the super peso tag from the Mexican currency. The incoming administration should adopt conciliatory rhetoric to buoy the peso. Let’s discuss this topic and make a trading plan.
Monthly fundamental Mexican peso forecast
A convincing victory of one party in an election usually indicates political stability and leads to lower volatility and appreciation of the national currency. Not in the case of the Mexican peso. The fact that Claudia Sheinbaum became the new president of the country, and her Morena party is ready to receive 2/3 of seats in the parliament, scared investors so much that USDMXN quotes soared to 7-month highs.
The reasons are plentiful. The majority of the ruling party means it can implement reforms and change legislation unilaterally. Judging by former president Andres Manuel Lopez Obrador’s proposals to eliminate independent bodies such as the Antimonopoly Commission, establish new pension obligations, raise the minimum wage, and directly elect Supreme Court judges, the markets may not favor them. Capital outflows will likely trigger the USDMXN rally.
The former president brought the budget deficit to 5.9% of GDP, the highest level since the 1980s. In previous years, the figure averaged 4.3% of GDP. Claudia Sheinbaum will have to make a herculean effort to fulfill her campaign pledges on social policy and patch the budget holes simultaneously. Without raising taxes, it is unclear how to do this. This leads to increased uncertainty and volatility in the peso, showcasing the highest volatility among the world’s 16 major currencies.
Mexican peso implied volatility and reversal risk
Source: Bloomberg.
The USDMXN rally was also driven by massive short-trade liquidation by hedge funds and asset managers. At the end of May, they reached their highest level since 2022. Speculators did not believe Barclays, which predicted the peso’s collapse by 3-4% if Claudia Sheinbaum won the presidential elections.
The peso was actively used in carry trades, which were very effective and created the term “super peso.” The future of USDMXN depends mainly on how quickly carry traders snap back to reality.
However, the peso’s strengthening is not the result of the carry trade alone. The strength of the US economy, Mexico’s main trading partner, and the relocation of Chinese production to Latin America to avoid Washington’s import tariffs have allowed USDMXN bears to have the best time.
Mexican peso performance under different administrations
Source: Bloomberg.
Mexico’s new president will surely try to reassure investors, which, along with the weakening of the US dollar amid growing odds of a September rate cut, will lead to a decline in USDMXN quotes. However, as the US presidential election approaches, the peso may see a new surge in volatility and bouts of weakness.
Monthly USDMXN trading plan
The USDMXN pair has hit its targets determined for long trades that were opened. As the situation stabilizes, short-term short trades can be closed, and medium-term long ones can be opened once the price rebounds from the support levels of 17.26 and 17.12.
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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