The party couldn't last forever, and USD/MXN has now established a firm uptrend. Several factors are at work to keep MXN under pressure in the near term. First, the market's interpretation of the Chairman Bernanke's comments have been largely dollar positive. While Bernanke did not give a time line for the implementation of the Fed's exit strategy, the mere fact the the Chairman and other FOMC members are ready to discuss the operational specifics for the unwinding of the Fed's balance sheet has spooked markets. Furthermore, general risk off sentiment has boosted the usual suspects. Indeed, both JPY and CHF are both up on safe haven demand.
More disconcerting, the internal strong internal fundamentals which helped MXN in the face of global headwinds have weakened somewhat. Growth slowed in the first quarter to 0.8 percent yoy. While stubbornly high inflation probably precludes a rate cut for the next couple of meetings, the Banco de Mexico may cut further in the fall should growth fail to recovery. While a resilient consumer has helped Mexico maintain robust service sector growth, a manufacturing slump driven by weak export demand continues to weigh heavily on overall sentiment.
Given these developments, I have revised up my year end target for USD/MXN to 11.8. I have cut down my short position at a loss, though I look to resell at a higher level. I will take positive economic data out of Mexico as a sign to re-enter, with a particular bias towards strong industrial production data. Lacking that, without strong signalling by the Fed of further easing, I see the pair climbing back up towards 12.8 in the near term.
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