Mexican Peso: A two-way street for now - Nomura

Mario Robles and David Wagner, Latam FX Strategists at Nomura, noted, "Most of the last year was complicated for MXN. While there were ups and downs for the peso, the negative moves ended up prevailing for good fundamental reasons. Things are slowly changing. Our scenario analyses suggest a wide range of favorable and adverse scenarios for USDMXN, and thus it is difficult to have much conviction on a unique fair value for the currency. As it currently stands, the remaining premium embedded in MXN allows the currency to react to headlines in a less asymmetric manner vs. last year."

Key Quotes

"While we are not out of the woods yet, market participants look to be assigning lower probabilities to tail risk scenarios as Mexico and the US prepare to sit at the negotiations table. We think that this slight change in the market’s psyche, following more positive (or at least less adverse) rhetoric from the new US administration around trade policy with Mexico, means that a range of adverse outcomes for Mexico are likely to have already been priced in, leaving room for positive developments to be asymmetrically priced in."

"Clearly, MXN has traded with a better tone in the past two weeks. In our view, this movement has co-existed with several other simultaneous changes, not only to fundamentals in both Mexico and the US, but also in global FX. These moving parts (and sometimes in opposite directions) makes our analysis yet more complicated, tilting our scale towards being neutral the currency until we obtain more information on the proceedings of trade negotiations and any significant change to Mexico’s external accounts."

"MXN should continue to trade range-bound in the short-term, and the catalyst for a sustained trend in the medium to longer-term remains elusive. This environment should provide various opportunities to trade wide ranges. This short-term dynamic could be dependent on headline news impulses and as external global conditions allow it." 

"Our view is that the absence of negative news in the short term, coupled with a weak broad USD backdrop, should result in positive price action for the MXN and potentially lower implied volatility levels." 

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