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Investing.com - Bank of America has initiated a long USD/MXN position at 18.62, targeting 20.00 with a stop at 18.00, as Mexico faces deteriorating economic conditions and potential for greater monetary easing.
Mexico’s economy is experiencing a demand shortfall with investment being hampered by trade policy uncertainty and domestic concerns related to constitutional changes, according to BofA’s analysis. The bank also notes weakening remittance inflows are hurting consumption while fiscal consolidation is leading to cuts in public spending.
The Mexican peso is currently overbought, BofA reports, with the position carrying a negative yield of 4.3% per year and historical volatility of 12.2%. The bank expects these economic conditions will lead to more monetary easing than markets currently anticipate, alongside a weaker exchange rate.
The upcoming USMCA review introduces additional uncertainty for the Mexican currency, with potential renegotiation possibly reopening tariff threats or tougher trade terms. This review represents another factor in BofA’s bearish peso outlook.
BofA identifies several risks to its trading position, including a potential hawkish monetary policy stance from Mexico’s central bank and a global risk-on environment that could weaken the US dollar against emerging market currencies.
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