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The initial market reaction to Banxico’s cut to 5.5% suggests that the decision was not more dovish than investors were expecting, according to analysts at CIBC Capital Markets who forecast the MXN gaining some ground as COVID-19 issues stabilize.

See: How could credit rating downgrades affect the Mexican peso?

Key quotes

“We expect the overnight rate to end 2020 at 4.0%, given the lack of a significant fiscal response and the quick and steep deterioration of growth prospects.”

“We expect MXN volatility to remain elevated, given the deterioration of growth prospects and the peso’s correlation to external news and US equities.” 

“We continue to see value in short USD/MXN positions on spikes toward the 25-25.55 range. No news is good news for the MXN, as the market has already priced in most of the country’s fiscal uncertainties and political risks.” 

“Moreover, Mexico’s considerable exposure to the US makes the country a primary beneficiary of a potential stabilization of the COVID-19 outbreak into late Q2 to Q3, while the MXN high carry relative to regional currencies should revive the market’s interest in the currency alongside any signs of improvement in the global economy.”