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25 Apr 2013
Forex Flash: Recent Mexican developments warrant caution - BBH
FXstreet.com (Barcelona) - Brown Brothers Harriman analysts note that the Mexican peso outperformed in Q1 due to a combination of 1) firm US and domestic data, 2) relatively high rates, 3) optimism regarding structural reforms, and 4) little central bank intervention in FX markets to prevent peso gains.
They see that those pillars have been shaken in recent weeks, and may help explain why the peso rally stalled near 12.0 this month and note that USD/MXN is now in a 12.0-12.40 range, but believe that the risks are now weighted towards a breakout to the upside given the less bullish developments of late. They write, “The 12.60 level provided strong support on the way down and so it is likely to provide strong resistance on the upside for USD/MXN. On the other side, a break below 12.0 is needed to signal the next leg of the peso rally which targets the 11.50 area. The direction of the eventual breakout will depend on both external and internal factors.”
Additionally, they add that positioning remains highly skewed towards MXN longs and according to the CFTC, net longs for the peso as of the week ended April 16 stand at 151k contracts, just shy of the record high 152k in January 2013. They finish by commenting, “And it’s not just the currency. Data show that international investors have poured money into Mexico local currency debt and equities, lured by relatively high rates and official indifference to a stronger peso. “
They see that those pillars have been shaken in recent weeks, and may help explain why the peso rally stalled near 12.0 this month and note that USD/MXN is now in a 12.0-12.40 range, but believe that the risks are now weighted towards a breakout to the upside given the less bullish developments of late. They write, “The 12.60 level provided strong support on the way down and so it is likely to provide strong resistance on the upside for USD/MXN. On the other side, a break below 12.0 is needed to signal the next leg of the peso rally which targets the 11.50 area. The direction of the eventual breakout will depend on both external and internal factors.”
Additionally, they add that positioning remains highly skewed towards MXN longs and according to the CFTC, net longs for the peso as of the week ended April 16 stand at 151k contracts, just shy of the record high 152k in January 2013. They finish by commenting, “And it’s not just the currency. Data show that international investors have poured money into Mexico local currency debt and equities, lured by relatively high rates and official indifference to a stronger peso. “