Mexican peso faces downside risks in near future

Since the start of May, the Mexican peso has illustrated amongst the worst returns for any emerging market currency. This, to a certain degree, is a sign of markets re-pricing the US dollar exchange rates because of several FOMC members’ hawkish comments. Surprisingly, the Mexican peso continues to be weak in spite of recovery in oil prices.

The Mexican peso faces risks on the downside in the near future, said Commerzbank in a research report. The rising probability of the US Fed hiking rates in July has not been entirely priced by markets yet. If this manifests, the USD/MXN pair is expected to trade at higher levels, added Commerzbank. The peso also faces a downside risk from the wider outlook for EM and China.

The Mexican peso had gained with other emerging market currencies when China’s activity data rebounded in the first quarter and when oil prices stabilized. However, these two tailwinds are likely to wane in months to come, according to Commerzbank. China’s activity data will begin to decline after the credit splurge in Q1.