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Analysts at Rabobank, point out that carry trade players are now likely to provide strong support for MXN and it will could take a significant USD bid in order to push USD/MXN north of 20 in the coming months.

Key Quotes:  

“Given that the 2yr swap spread has been stable over the past month this comes as little surprise and USD/MXN price action seems to be playing catch up with rate differentials having diverged substantially during the carry trade unwind seen in the second half of Q2. Indeed, before the USD bid and carry trade unwind induced rally in USD/MXN from mid-April to mid-June, the pair sat closer to the 18 handle and while we don’t expect to see a 17 handle persist, we certainly see room for USD/MXN to move towards the 18 handle, particularly during any period of USD weakness.”

“In terms of levels, the 19 handle remains key and below there, 18.44 should offer support ahead of the all-important 18 handle which held the move lower back in April. USD/MXN did trade as low as 17.94 in April but only on an intraday basis and we did not see a confirmed close below 18. On the upside, 19.70 is the key resistance level to watch out for if USD/MXN is to make a break north of 20 again.”

“In the aftermath of the last Banxico meeting we suggested that the Bank stands ready to hike again at the August meeting. That being said, we made that call on the premise that USD/MXN would be trading north of 20.”

“Banxico may well stand pat and hold rates at 7.75% next month. We expect Banxico to remain highly dependent on USD/MXN developments which means we cannot rule out another hike this year, particularly given that the slowdown in consumer price pressures appears to be abating.”

“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 next month but as we head into year-end we cannot rule out a text of the 20 handle. The Budget release on December 15th will be key for MXN sentiment.”