USD/MXN threatens the June low again
The three-day rout in US equities led to a bounce in the US dollar but one spot where the bounce was particularly faint was in USD/MXN. The pair is down more than 1% today and is once again threatening the June low of 21.47.
Mexican GDP is forecast to fall 10% this year after a small decline in 2019. There is no doubt the economy is struggling in the short-term but the peso is still at a historically weak level.
All emerging market currencies have been laggards in the recovery this year. The peso has rebounded 17% from the lows but remains down 12.2% year-to-date.
For those with a longer term perspective, there is much to like about the peso. Given the US-China trade war, more companies are likely to move production to Mexico where they can maintain access to the US market. The new USMCA trade deal adds certainty that will continue.
In the shorter-term, a Biden election win would also diminish bi-lateral tensions. I have little doubt that one of his early goals would be rebuilding the relationship.
Domestically, debt is a concern in Mexico but Lopez-Obrador said he aims to leave debt-to-GDP at the same level as when he entered office. In any case, the market is nowhere near fretting about goverment debt. 10-year EUR-denominated bonds are yielding 2.08% and 3.3% in USD.
As for the chart, I wrote about this level late last week and continue to watch 21.47. My first target on a break is 20.00.
