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According to analysts from Rabobank, the Mexican peso remains the most attractive carry currency and offers the best risk-adjusted returns. They see that the relationship between USD/MXN and oil remains insignificant and the relationship with 2yr rate differentials has diminished as it still remains attractive despite the decline. They noted that NAFTA risks continues to loom but progress between the US and Mexico erodes the worst case scenario for Mexico even if a trilateral agreement isn’t reached.

Key Quotes:  

“MXN is the best performing currency this year and with a gain of 4.5% against USD, it is the only currency to post gains of more than 1.5% against the Greenback. It is interesting to note that MXN sits with traditional safe havens JPY and CHF (and NOK) as one of the only currencies to rally against USD this year. Of course, at first glance MXN would seem like an odd bed fellow with safe haven currencies given that MXN has historically been one of the highest beta currencies globally (alongside ZAR). But, MXN has not relinquished that role.”

“We maintain the view that MXN is likely to continue outperforming most EM currencies in the coming months and we still prefer being long MXN and collecting the carry than positioning for a move higher in USD/MXN. That being said, for those unable to be nimble in positioning it is important to be cognisant of the likely spikes in USD/MXN we will see on the back of carry trade unwinds and profit taking. We have seen these sharp, short-lived moves occur on numerous occasions in recent months and we expect that we will continue to see these types of moves in the months to come. For USD/MXN sellers and carry trade players this offers opportunities for more favourable entry levels but of course it also poses a risk to those already holding long MXN positions and from their perspective USD/MXN protection through options looks historically attractive.”

“Our USD/MXN forecast maintains the same logic we have outlined over recent months which has held us in good stead. We expect carry trade demand to remain supportive of MXN but our bullish USD view is likely to mean that a 17 handle is off the cards for USD/MXN. We expect the pair to primarily trade in the 18-19 region over the course of the coming months. We suspect a NAFTA deal is unlikely in the coming weeks but headline noise could lead to a rise in USD/MXN vols as could the US midterms in November, particularly if a NAFTA deal has not been solidified by that juncture.”

“We expect Banxico to leave rates on hold at 7.75% which we expect will prove to be the terminal rate of this hiking cycle. While it is true that inflationary pressures are ticking slightly higher, we don’t expect CPI inflation to remain on a course higher and instead see pressures easing as we head into next year.”