- Emerging market currencies remain under pressure amid risk aversions.
- USD/MXN erases yesterday’s losses, approaches the upper limit of the current range.
- Banxico meeting on Thursday: Consensus expects no change, but some see a rate cut.
The USD/MXN accelerated to the upside during the American session, and it just broke above 19.70, reaching the highest level in two days and making a critical reversal from 19.35. The next relevant resistance is the 19.80 area: a consolidation on top would clear the way for a test of 20.00.
The US Dollar gains 2% against the Peso, the most in two months, boosted by risk aversion across global markets that weight, particularly on Emerging market currencies. Growth concerns impact on market participants.
On Thursday the Bank of Mexico will decide on monetary policy. Currently, the rate stands at 8.25% the highest in a decade. With the economy stagnated, the bias favors a dovish statement but not necessarily a rate cut yet.
From a fundamental perspective, the current financial environment is not positive for Emerging markets. Expectations of rate cut across the G10 are not enough to offset global growth concerns, geopolitical conflicts and the new collapse in Argentinean assets. The last might not have a significant impact in the future, but near term, it had an impact in Latin American currencies. “In our opinion, the contagion from Argentina to other emerging markets will be limited (unless it defaults on its debt) due to the relatively small size of the Argentine economy and easing mode of the Fed and ECB. In general, emerging markets are driven more by trade war issues, the state of the global economy and the monetary policy stances of the Fed and other big central banks”, said Danske Bank analysts
Regarding USD/MXN, Rabobank analysts consider that the recent move in pushed the pair above their 19.30 forecast from a month ago and close to their 19.80 target for the end of Q3. “Our forecast is for the pair to trade with a 20 handle heading into year-end but of course we could get there much sooner. That said, we are reticent to change our forecast quite yet and will wait to see how markets trade for the entirety of this week”.