USD/MXN: TWO MAJOR RISK FACTORS MIGHT CONTRIBUTE TO SOME PESO WEAKENING AHEAD – MUFG

Hawkish Banxico stance sparked MXN appreciation in February. Looking ahead, economists at MUFG Bank do not see much room for further strengthening. 

Banxico will promote more moderate 25 bps hikes in upcoming meetings

“Higher rates for longer will keep the MXN attractive as a carry currency helping to explain further MXN appreciation registered during February. However, we don´t see much room for further strengthening, assuming that Banxico will promote more moderate 25 bps hikes in upcoming meetings. Later this year when it sees clear signs of a more significant inflation slowdown, we expect Banxico to start cutting its policy rate.”

“We keep our view that two major risk factors might contribute to some MXN weakening ahead. Firstly, the slowdown/recession in the US might hit inflows into Mexico from trade, direct investments and wage remittances. Secondly, Lopez Obrador’s nationalistic policies especially on the energy sector may deter private investments. However, the MXN might continue to be supported by investment and exports from companies reallocating global supply chains into Mexico.”