MXN de-correlated with Latam currencies, intervention risks rising - TDS

According to Sacha Tihanyi, Senior Emerging Markets Strategist at TDS, the risks of an intervention from the Bank of Mexico to support the peso (MXN) continues to rise, but USD/MXN is still below February highs.

Key Quotes:

“We update our MXN intervention risk tracking, and note that MXN is now nearly asseverely de-correlated with our Latam FX dynamic index, as the last time that Banxico  intervened, though de-correlation has come more rapidly now than during the January through February.”

“In addition, other Latam FX correlations to our market dynamic index remain relatively strong and positive, underscoring indications that MXN is de-coupling too severely from market drivers (relative to the region).”

“Thus the context of intervention risk has moved from “yellow” to a brightly blinking “orange”, and verging on red should the past two days of price action see follow through.”

“Two ameliorating factors remain (for now) to restrain MXN intervention risk: USDMXN remains below the highs of last week, and the February intervention highs, which may restrain the desire for more immediate action”.

“Thus while MXN is decoupling from market dynamics in a correlative sense, the absolute deviations are not yet as bad. Next week will be crucial for MXN, and there is in our view a great degree of risk surrounding the market’s reaction to the FOMC.”

“ This leaves significant broad USD upside risk and thus further pressure on the peso, but the degree to which MXN underperforms vis-à-vis Latam and the tradeweighted USD will influence Banxico; a hawkish surprise will enhance the market context that has in the past led Banxico to act.”