Key Moments
- USD/MXN and USD/BRL moved above key levels at 17.50 and 5.20, bringing 200-day moving averages at 17.78 and 5.25 into focus.
- Markets have been pricing roughly 70 bp of Banxico rate hikes over 12 months to maintain a policy buffer against potential Fed tightening.
- The current 275 bp spread between Banxico’s policy rate and the upper bound of the Fed funds target range stands at its narrowest in a decade, compared to a median of about 550 bp.
LatAm Currencies Weaken as Dollar Rebounds
Societe Generale strategist Kenneth Broux reports that Latin American currencies have come under renewed pressure as the Dollar has strengthened, pushing USD/MXN and USD/BRL through important resistance levels at 17.50 and 5.20. The bank highlights that the 200-day moving averages, located near 17.78 for USD/MXN and 5.25 for USD/BRL, now represent the next potential upside targets.
| Currency Pair | Key Level Breached | Next Level (200-day moving average) |
|---|---|---|
| USD/MXN | 17.50 | 17.78 |
| USD/BRL | 5.20 | 5.25 |
According to Broux, “LatAm currencies have not escaped the force of the resurgent dollar. The MXN and BRL backed up above key hurdles of 17.50 and 5.20 respectively for the first time in almost three months and puts loftier levels in play around the 200dma at 17.78 for USD/MXN and 5.25 for USD/BRL.”
Banxico Policy Outlook and Market Expectations
Societe Generale notes that “Banxico is overwhelmingly expected to leave its policy rate unchanged at 6.50% today. It signalled at the last meeting that policy easing is effectively over.” This expectation of a hold comes as investors reassess the trajectory of Mexican rates in the context of a stronger Dollar and potential moves by the Federal Reserve.
Money market pricing reflects a conviction that the next phase for Mexican rates will be higher. As Broux states, “Money markets firmly believe the next move in rates is up. Mexico has a history of shadowing US monetary policy and maintaining a buffer is prudent in the even the Fed were to tighten.”
Narrowing Rate Differential With the Fed
The analysis underscores that “The gap between Banxico rate and the upper boundary of FF target range is currently 275bp, the lowest in a decade and compares to a median spread of around 550bp.” This reduced differential is central to the market’s expectation that Banxico may need to tighten policy to preserve a cushion relative to the Federal Reserve.
Societe Generale points out that “The money markets are pricing about 70bp of tightening over 12 months and any attempt by the central bank to play down future tightening could temper dip buying interest in the peso.” For MXN, the balance between Banxico’s communication and actual rate moves could be an important driver of investor appetite and the currency’s performance against the Dollar.
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