Rabobank strategists Molly Schwartz and Christian Lawrence report that the Mexican Peso (MXN) has appreciated 3.57% against the US Dollar (USD) year-to-date, though it has weakened on a month-to-date basis [1]. The strategists note a gradual decline in non-commercial speculators' net long MXN positioning and anticipate further contraction in these positions [1].
The analysts attribute the recent and expected future weakness in the MXN to a deterioration in carry attractiveness, driven by narrowing interest rate differentials and rising implied volatility [1]. Despite these headwinds, Rabobank maintains a constructive outlook on the MXN relative to other currencies, citing ongoing carry demand as a source of relative support [1].
Rabobank highlights that the Bank of Mexico (Banxico) has cut the overnight policy rate to 6.50%. While the market is pricing in 34 basis points of hikes by year end, Rabobank expects Banxico to hold rates steady [1]. USD/MXN implied volatilities have been trading sideways across the term structure for the past month [1].
Looking ahead, Rabobank forecasts the USD/MXN exchange rate to rise toward 17.9 over a three-month horizon, reflecting their expectation of further MXN weakness in the near term [1].
CONCLUSION
Rabobank expects the Mexican Peso to face further weakness due to less attractive carry and narrowing rate differentials, though it should remain relatively supported compared to other currencies. The strategists forecast USD/MXN to move higher toward 17.9 in the next three months, with Banxico likely holding rates steady despite market expectations for hikes.