USD/MXN: Mexican peso likely to trade weak in months ahead - Commerzbank

Analysts at Commerzbank, expect the USD/MXN pair to remain above the 20 mark in the short term due to ongoing concerns about an imminent end to NAFTA.

Key Quotes:

“Things can change very quickly sometimes. While NAFTA optimism prevailed at the beginning of the year, concern that the US could terminate the free trade agreement is now dominant. The movement in USD/MXN reflects these swings in market sentiment. The optimism is unlikely to return in the short term and MXN is therefore likely to trade weak in the coming months.”

“We have adjusted our MXN forecast in line with the latest developments and base it on the following scenario: negotiations are likely to stall before the elections in Mexico and the midterm elections in the US. But we do not expect the negotiations to end completely and believe they will continue and be successfully concluded in 2019. Against this backdrop, we expect USD/MXN to remain above the 20 mark in the short term due to ongoing concerns about an imminent end to NAFTA. Next year we then expect the peso to recover as talks continue and it becomes increasingly clear that the negotiating parties could reach a consensus.”

“The worst scenario for Mexico and the peso would probably be an end to NAFTA and a hard line from the US towards Mexico – instead of applying WTO rules, the US could impose high tariffs on Mexican products. The US continues to be the biggest buyer of Mexican products, accounting for 80% of total exports.”

“A scenario that is probably unlikely from today's perspective but still possible of course would be a quick agreement between the US, Mexico and Canada. In this case, the peso should quickly recover its losses of recent weeks and drop below the 18 mark against the USD.”