2022-10-14 2022-10-14
Mexican peso throttles back. Forecast as of 14.10.2022

Dmitri Demidenkohttps://www.litefinance.org/blog/authors/dmitri-demidenko/

USDMXN quotes would steady amid the commodity market’s favorable state, foreign money transfers, solid foreign demand, and the Bank of Mexico’s aggressive monetary restriction. Things risk changing in 2023. Let’s discuss it and make a trading plan. 

Six-month fundamental forecast for Mexican peso

However strong a monster may be, there will always be someone who will challenge it. They do not call the USD by any name other than “green monster” in Forex after its drastic consolidation in 2022. However, the greenback did not grow against all currencies. It has weakened 5.6% against the Brazilian real and 2.3% against the Mexican peso since the beginning of the year. The stability of Latam currencies would be surprising if not for a solid foundation.

At the end of September, the Bank of Mexico raised the rate by record 9.25%, showing its intention to fight inflation to the detriment of economic growth. The Banxico copies the Fed: borrowing costs were raised by 75 basis points at three consecutive meetings. At the same time, the Governing Board forecasts that inflation will remain at 8.6% by the end of 2022 and get back to the target of 3% only in 2024.

Banxico’s rates and inflation

Source: Bloomberg.

The minutes show that the Board members had different opinions. The first group believes the rate must increase to 9.75-10% to stabilize the peso. The other group thinks the borrowing costs have reached a neutral level, so monetary restriction should somewhat slow down not to harm the economy too much.

Banxico’s next moves can set a new precedent. It started policy tightening in June 2021, earlier than the Fed. Whether or not policy tightening should continue is still debated. The IMF understood everything right and called on Latam banks not to drop rates too early. The financial agency forecasts Latam inflation to slow from 7.8% in 2022 to 4.9% in 2023 and GDP – from 3.5% to 1.7%.

Inflation forecasts for Latam

Source: Bloomberg.

According to the IMF, commodities’ high prices, strong foreign demand, tourism recovery, and money transfers from US-based Mexicans used to smooth the negative effect of monetary policy tightening. However, things may change in 2023. Capital inflows are slowing down, and export prices are falling. So, GDP could reduce twice in 2023.

Altogether I agree with the IMF. The Fed’s aggressive monetary tightening cools down the US labor market, ultimately impacting money transfers to Mexico. Concerns about an upcoming global recession led to lower commodity prices – bad news for the exporting country. Finally, the Bank of Mexico doubts that it should follow the Fed. It will likely throttle back in the coming months, affecting the peso.

Six-month trading plan for USDMXN

So, the change in the commodity market’s state, the upcoming recession, unfavorable to high-risk assets, and Banxico’s readiness to stop raising rates create a foundation for the USDMXN’s rally. I expect the quotes to rise to 20.3, 20.5, and 20.7 in 1, 3, and 6 months. My advice is to buy.

Price chart of USDMXN in real time mode