MXN to maintain a volatile trading pattern during the first months of the year

The Mexican peso (MXN) will maintain a volatile trading pattern during the first months of the year. The key factors affecting the valuation of the MXN include: the direction of the US dollar (USD) versus its peer currencies, the relative strength of the US economy, the pace of interest rate adjustments to be implemented by the US Federal Reserve, the evolution of crude oil prices, further currency intervention by the Mexican central bank, and the overall investor sentiment embedded in systemically relevant emerging market economies (particularly, China and Brazil). 

The MXN depreciated by 14% against the USD over the past 12 months (a relatively positive performance when compared against the 33% depreciation of the Brazilian real). The central bank has intensified its intervention in the FX market in order to moderate the disruptive effects of volatility spikes. In fact, FX reserves declined by US$20 billion last year. 

"The Mexican economy is well positioned to gain some traction in the coming years; we estimate that real GDP will expand by 2.8% and 3.5% in 2016 and 2017, respectively, up from an estimated growth of 2.5% in 2015", says Scotiabank.

On the monetary front, Banco de Mexico executed its first adjustment to its policy setting rate (increasing it by 25 basis points to 3.25%) in strict alignment to the US move. Headline inflation remains contained, for now, as reflected by the latest reading of 2.2% y/y in November.