📝See MXN Vulnerable to Risk Aversion: BBVA Strategy

The surprise in the Congress composition has already taken a negative toll on the currency’s performance. In our view, the depreciation might prove transitory as an attractive carry will likely keep the MXN somewhat anchored in the near term.

Nonetheless, we reiterate our negative directional outlook for the currency mainly because of a less appealing carry, the US-Mexico relation surrounding election dates, weaker growth, fiscal consolidation, the PEMEX burden, the MXN’s valuation vs. other currencies and the potential for constitutional reforms. These factors should leave the currency in a vulnerable position to buffer risk aversion reactions. Technical Analysis: an electoral comparison: the MXN appreciated early in the year in 2018, reaching a low of 17.94 in April before rebounding to 20.96 by mid-June (the year’s highs) two weeks before the election. The USDMXN then continued on its downward trend until early August.

In contrast to the appreciation of the MXN days before the 2018 election, the current trajectory of the USDMXN is to the upside. After reaching a 16.50 support in May, it rebounded without entering oversold territory and has continued to climb, confirming a sustained reversal on the last trading day before election Sunday. - BBVA Strategy