In our latest notes, we have been arguing that the MXN should probably maintain its positive momentum in the short term. YTD, the MXN has outperformed most of its peers. One of the main factors behind the MXN’s good behaviour is its attractive FX carry trade due to the current monetary restrictive cycle. Banxico will most likely follow in the FOMC’s footsteps in its next meetings, so the FX carry should maintain its appeal.
On the other hand, the MXN has also endured less volatility than its peers. The Mexican peso has been inconspicuous on the global stage compared with more dramatic developments in other countries. Therefore, the MXN has performed positively, even with the appreciation of the DXY. In recent weeks, the dollar has fallen while emerging-market currencies gained traction. Going forward, we expect a more stable dollar, which should benefit emerging-market currencies.
The carry trade and volatility are not the only reasons behind MXN’s positive performance. The currency is better positioned than its peers in our BBVA Market Strategy FX ranking. The MXN has outperformed thanks to market conditions, but also because of Mexico’s fundamentals, as it is better positioned than its peers and its macroeconomic framework continues to be stable.
Going forward, we believe the dynamics mentioned above will prevail and, as we have mentioned previously, we expect the MXN to maintain its positive momentum in the short-term towards levels close to 19.0.
From a longer-term perspective, we should bear in mind that risks have not diminished. In 2023, Mexico could be in the spotlight that could trigger a higher risk premium and thus volatility in local markets. However, as this scenario isn’t likely to materialise soon, we are maintaining our positive outlook for the MXN. We do not anticipate any depreciation or volatility just yet as a result of the aforementioned risks.