USD/MXN: We believe the peso may remain near 17.00 in the near future.
Banxico's decision to initiate a rate tightening cycle was not easy.
According to the statement, the main driver was to avoid additional currency volatility as a result of a Fed lift-off.
MXN is stuck in a riddle for two major reasons,
First, inflation is at all-time lows, near 2.3% y/y against the target range of 2-4%. Structural reforms in January could be only partially blamed for this.
Secondly, fiscal policy tightened significantly to offset low oil-related revenues. Oil is responsible for about a third of public sector revenues but only a third of those revenues have been hedged.
USD/BRL: All Fitch, S&P and Moody's have downgraded investment themes in Brazil. These should push USD/BRL to 4.80 by March next year. The main reasoning behind these downgrades is the lack of resolve to stabilize fiscal dynamics.
The government is supposed to reach an agreement on 2016 fiscal targets. Brazil is running the highest real interest rate in the world. Furthermore, debt to GDP is amongst the highest across EM.
All of these aspects may propel USD/BRL to 4.75- 4.85 by March in New Year.


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