- Mexican peso recovers ground against US dollar but still remains under pressure.
- USD/MXN continues to consolidate above 20.00, near five-month highs.
The Mexican peso rose against the US dollar on Wednesday supported by a positive performance from emerging markets, a weaker US dollar and a recovery in crude oil prices. The USD/MXN pair dropped below 20.30 and bottomed at 20.16, a 2-day low. Near the end of the session is trading at 20.23/25, down 0.60% for the day.
The move lower represents a correction after trading yesterday above 20.50 and near the highest levels in months. The trend still points to the upside but as long as the pair remains under 20.50, gains look limited. On the flip side, a move under 19.90, could signal that a potential peak is in place.
The USD/MXN pair holds bullish tone and despite today’s retreat, trades significantly above the level it had a month ago. The combination of the sell-off in crude oil, risk aversion in global markets and rising uncertainty regarding President-elect Andres Manuel López Obrador (AMLO) policies pushed Mexican assets sharply lower.
“Markets are still recovering from AMLO’s decision to cancel the ongoing construction of Mexico City’s new airport. The surprise decision prompted the recent response in asset prices and we think that this story is
not over yet and could carry more costs than are currently apparent. This event might hint at how AMLO is likely to deal with investors under his administration that is set to begin on December 1st“, said CIBC analysts. They warn that volatility should remain high.
Holiday in the US, inflation data in Mexico
On Thursday, Wall Street will remain closed for Thanksgiving. In Mexico, key data is due with the mid-month inflation report. Analysts at BBVA expect a reading of 4.60% (y/y) that compared to the 4.87% of the previous months. “After picking up their pace in October, our gasoline price tracker suggests that gasoline prices did not increase in the first half of the month. All year we have been anticipating a favorable base effect to bring down annual headline inflation in 4Q. It already eased in October, it is set to fall further in Nov-Dec,” says Javier Amador, economist at BBVA.
He explains that despite the slowdown in inflation, the risks are tilted for an additional 25bp hike from Banxico at the December’s meeting. “Our base scenario still anticipates Banxico to stay on hold if the 2019 budget proposal does not increase market jitters further. The key will be the budget. Our call will most likely depend on the budget outcome“, adds Amador.
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