USD/MXN: Peso to benefit further from improving carry trade conditions – MUFG

USD/MXN has fallen sharply in recent days. Economists at MUFG Bank analyze the pair’s outlook.

Peso could be undermined as well if US recession risks intensify

The recent improvement in market conditions is favourable for further carry trade performance.

The risk of financial market disruption from a further adjustment higher in US yields has diminished in the near term. The updated Fed guidance and release of the much weaker US NFP report for October should help to prevent a further US bond market sell-off. Market participants should remain more confident that the Fed has already delivered its last rate hike.

The risk is that the MXN could be undermined as well if US recession risks intensify. We are not expecting that to take place in the near term when most other US economic indicators have remained strong.

An unexpected rate cut from Banxico poses another downside risk for the MXN in the week ahead.