Mexican Peso: Carry-driven strength extends against US Dollar – Rabobank

Rabobank's Christian Lawrence and Molly Schwartz highlight that USD/MXN has broken below 17 for the first time since May 2024, prompting a forecast revision toward 16.5 in coming weeks. They see strong carry demand and subdued volatility keeping MXN supported, while a mild retracement is projected for next year, with the pair staying within recent ranges and not breaking below 16.25.

Technical break reinforces MXN strength

"We expect strong demand for carry to remain supportive MXN and the recent break down through 17 opens up a move to 16.5 in the near term. We do have a mild retracement baked in for next year but well within recent ranges."

"USD/MXN price action confirmed a close below the 17 handle (a close below followed by a subsequent lower close) which we have been monitoring closely as that opened up thin air down to mild support at 16.45/49 before strong support at 16.25. That move lower triggered warning signals in our proprietary reversal indicator and we did see bullish divergence form."

"In light of this we are targeting USD/MXN hitting 16.5 in the coming weeks, and while we cannot rule out an extension below there, we do not expect the pair to break below 16.25."

"On the flipside, if volatility spikes, we’ll be back at price congestion in the mid-17s in the blink of an eye with a move back above 18 more than feasible in short order."

"We have revised our forecast for USD/MXN lower to reflect the confirmed close below critical support at the 17 handle and our view that the outlook for FX volatility has structurally shifted within the current regime and that MXN’s reaction function to volatility has also been reduced."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)