Is Banxico's Intervention the Key to USD/MXN Reaching 17.00?

30th of April 2024

Short-term outlook: Steady progress in defying conventional norms

The USD/MXN pair has surprised investors by breaching key support levels at 17.00, 16.70, and 16.50, contrary to expectations. It's important to understand that the dynamics influencing the MXN's flow extend beyond CTAs and Hedge Funds. Portfolio inflows into fixed income and equities also play a significant role in the FX market, contributing to the beating of these support levels. 

In the equity market, there was high demand for REIT products known as "Fibras," especially those holding "reshoring assets" like Fibra MTY and Fibra Prologis, which were oversubscribed in Q1. 

Similarly, América Móvil issued two substantial bond offerings in MXN, each valued at around 1.2 billion USD. The timing of these offerings coincided with significant events in the USD/MXN market, contributing to increased foreign investor interest in MXN. 

On April 5, USD/MXN dropped below 16.50, with the next support level expected at 16.25 before the end of Q2. Current positioning indicators differentiate between CTAs/FX Speculators, who typically follow momentum and have increased their positions recently, and participants like AFOREs, who generally maintain long USD/MXN positions to hedge local portfolios. 

With the Presidential elections approaching on June 2nd, and considering potential profit-taking by the CTA community closer to the elections, it's unlikely that USD/MXN will break below 16.00. Instead, a retracement towards 17.00 is anticipated.

What are the important data releases in the upcoming weeks that you should keep in mind? (UTC time)

Mid-term outlook: MXN's much-anticipated steadiness over the years

The USD/MXN pair has been showing steady improvement compared to other currency pairs against the USD. This can be attributed to the pair's low volatility, which makes its carry too attractive to overlook. However, with the upcoming US Presidential elections, memories of Trump's first term might trigger more significant profit-taking, possibly prompting Banxico to take actions (jawboning) to bolster the MXN, potentially pushing it back towards the 17.00 level.

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