Mexican Peso Weekly Forecast: USD/MXN Underpinned By Rising Yields

Coins, Banknotes, Money, Currency, Finance, Cash

The Mexican Peso seems to be taking its time in its attempt to push higher, despite improving fundamentals. The Mexican currency has lost ground against the Euro and the US Dollar this week, with the move higher in USDMXN and EURMXN partly underpinned by a rise in bond yields.

Quarterly GDP data posted on Friday showed that Mexico’s economy grew 0.4% in the first quarter compared to the previous three-month period, beating expectations that had predicted another contraction. Compared with the same quarter a year earlier, the economy shrank 3.8% in unadjusted terms.

Focus next week will be on the CPI reading for the month of April, after the half-month CPI data showed a 0.06% growth in the first two weeks of April, with the core reading as high as 0.18%. This puts further pressure on Banxico – Mexico’s Central Bank - to decide whether it wants to focus on keeping prices stable or on achieving full employment and aiding economic growth.

We’ve seen other Central Banks around the world start to show a more hawkish message as economic figures show improving economies, but the likelihood of rate hikes is still pretty far away for most developed economies. But Mexico may be one step closer and there will be special attention to the message delivered by Banxico in its next meeting on May 13th. Any sign that monetary policy may become less accommodative would be positive for the Mexican Peso and we would start to see the carry trade argument come back into play.

In the short term, the move in bond yields is likely to be the key factor underpinning USDMXN performance, with the US Dollar starting to shed off some short positions after a month of consecutive selling. Joe Biden proposed on Wednesday another round of trillions of dollars of fiscal spending, just after recent data had shown the US economy accelerated in the first quarter of the year, pushing US 10 year treasury yields above 1.68% after a few weeks of cooling.

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