It’s always a bit difficult to get a gauge on emerging market currencies, but it should be noted that the Mexican peso is primed to continue seeing gains, despite the fact that as I write this article, the Federal Reserve has raised interest rates by another 25 basis points. This is because of the massive interest rate differential between the 2 currencies, and the fact that the Federal Reserve might be closer to the end of its monetary tightening policy that it once was. Remember, the market is trying to suss out what happens next, therefore trying to price in the future.
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Underneath, I suspect that the 16.50 pesos level could be an area of interest, but breaking down below that opens up even further selling. In that situation, I think it opens up the gates to the 16 pesos level, followed rapidly by the 15 pesos level as it would have been a significant breakdown of previous support. On the other hand, if we were to turn around and get a bit of a bounce, and that’s probably due by now, I suspect that the “ceiling in the market” right now is 18 pesos. However, it is worth noting that the pair will get absolutely crushed if there is some type of financial event. After all, the US dollar is going to be considered a much safer asset on then the Mexican peso, and of course people will be flooding into the US Treasuries markets at that point. Nonetheless, the Banco de Mexico has a current rate of 11.25%, and therefore as long as things are relatively stable, it does make a lot of sense that we would see traders holding on to that swap as it pays quite well.
- At this point, any rally will more likely than not see selling pressure unless there is some type of crisis, and therefore I think it’s more likely than not that the market will try to work its way down to the 16 pesos level during the month of August.
- Furthermore, there are questions about whether or not the Federal Reserve will continue to raise rates this year, and if they don’t, then there’s no reason to think that this interest-rate differential is going to change anytime soon.
- As long as inflation is a problem in Mexico, this pair could continue to suffer.
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