Thumbnail Sketch of the Peso Ahead of Banxico's Decision

The central bank of Mexico is expected to deliver a 25 bp rate hike later today that would lift the overnight cash target to 11.25%. The swaps market says this will be the last hike in the cycle. However, with a further hike by the Fed possible, it seems unlikely that Banxico will declare mission accomplished. Still, Mexico’s overnight rate is above current inflation.  CPI in February was about 7.6% and the core rate (excluding food and energy) stood near 8.3%.

The dollar recorded six-year lows on March 9 (~MXN17.8980) on the eve of the banking crisis. The investors had seemed overweight peso exposure (surveys of asset managers) and the peso was the strongest emerging market currency. As the banking crisis rippled through the capital markets, risk-off sent the greenback to around MXN19.23 on March 20.

However, since the financial stress receded, the Mexican peso recovered smartly. The dollar slumped to MXN18.05 today. The momentum indicators suggest further dollar declines are likely. The peso has regained the top position for the year-to-date currency appreciation (~7.80%).

Three of the top four EM currencies this quarter are from Latam (after MXN, the Chilean peso is up 7.2% and the Colombian peso is up 5.2%. The Hungarian forint is in the mix with a 6.5% gain). A common element are high interest rates, though other high-interest rate currencies, like the South African rand and Turkish lira are lower on the year (~5.75% and 2.6%, respectively).

The median forecast in Bloomberg’s poll has been consistently less bullish the peso and remains so. The median forecast for midyear is MXN18.60 and MXN18.80 for the end of Q3. The year-end median forecast is MXN19.00. At the end of February, the median forecasts were MXN19.00, MXN19.10, and MXN19.10, respectively.

On the other hand, speculators in the futures market are net long 51.5k peso contracts as of March 21, the latest CFTC data. Of the actively traded eight currency futures at the CME, the speculative market is only long two: the peso and the euro. They are net short the others.

A break of the March low targets the MXN17.82 area, and then the MXN17.50. 

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