E-mail:    

The BOM strategy to offset Peso inflation has been innovative as well as determined. In 2015, inflation reached record low levels. The BOM kept its key rate at 3.00% and auctioned Dollar reserves reducing Peso liquidity. This kept lending rates at a level sufficient for sustainable growth and at the same time, supported the Peso. In February 2016 the BOM became more aggressive by announcing it would intervene directly in FX markets if necessary3. The BOM also shifted its meeting schedule to run behind the Fed, thus might react to Fed increases (instead of guessing beforehand), to keep the exchange in sync with the USD.    

Other events have also weighed on the Peso. Two OPEC meetings could not reach an agreement on production caps and at the St. Petersburg International Economic Forum 15 June4, Russian Energy Minister Mr. Alexander Novak stated that there was ‘no point’ in negotiating with other petroleum producing nations to cap production. The Russian economy is in an ongoing recession and has increased its own production to match, if not exceed, that of the Saudis. It is clear that the Russians consider their oil revenue a matter of national importance. It’s important to note here the correlation between USD/MXN exchange and Brent Crude from 8 June to the present. 

Another factor weighing on the Peso5 is the possibility that a ‘Brexit’ may lead to a global slowdown, thus reduce demand for petroleum.  Also, ongoing negative statements about existing trade with Mexico by the US Republican Presidential Candidate, Mr. Donald Trump, may be causing cautionary capital outflows. (N.B.: Mr. Trump has not included Canada in his rhetoric, although just as much Canadian bilateral trade exists with the US). Lastly, is the US economy, itself. The very same economic data which caused the Fed to further delay a rate increase may lead to a slowdown in US consumer spending. About 70% of Mexican exports to the US are destined for the retail consumer market.

The point of the matter is this. Although the BOM has made every effort to stop the Peso from weakening further without having to increase rates, some events may be out of its control. The BOM may be forced to increase its target rate and then more than in measured steps. It moved 50 basis points in February and may do so again, along with continued currency intervention.  The point is that it’s difficult to see a long term strengthening of the Peso vs the Dollar. However, based on recent past history, the BOM is like to make every effort to hold its ground at MXN $19 support to MXN $17 resistance.

Mike Scrive
Technical Analyst
Accendo Markets

CFDs, spread betting and FX can result in losses exceeding your initial deposit. They are not suitable for everyone, so please ensure you understand the risks. Seek independent financial advice if necessary. Nothing in this article should be considered a personal recommendation. It does not account for your personal circumstances or appetite for risk.

<<Previous


1 Bloomberg 4 February
2 Reuters 5 May
3 Reuters 17 February
4 Bloomberg 15 June
5 WSJ 14 June