USD/MXN set to remain volatile in near- to-medium term

Last year, the Mexican peso saw a severe downward trend. Like in several other emerging market nations, this was mainly because prospects of a rapid normalization of the U.S. monetary policy. However, it appears that this might take some time yet as the U.S. data has come out to be quite disappointing and the Fed taking cautious steps. Furthermore, the Bank of Mexico has sharply hiked its benchmark rate. However, the Mexican peso has not gained from the USD weakness.

In 2016, the MXN has been one of the underperforming currencies in Latin America and definitely in the wider emerging market space. This is predominantly because of the investors’ preference to sell the peso as a means of showing a negative view on the emerging markets as a whole due to low transaction costs and a cheap cost of carry, said Commerzbank in a research note.

The currency pair USD/MXN appears set to remain volatile in the near-to medium-term, partially because of uncertainty before the elections in the U.S. Apart from likely further rate hikes by the U.S. Fed; Mexican peso faces downside risks from the wider outlook for emerging markets and in another downward correction of oil prices.

“Despite the interest rate advantage over the US and other emerging markets, we rather expect the peso to move sideways overall”, added Commerzbank.