The Mexican Peso is likely to recover after its deep decline after the elections, according to analysts at Rabobank, who forecast USD/MXN rebounding to a base case target of 18.10, but possibly even lower, over the next month.
“We see USD/MXN trending back down to the 17.80 region with the potential for a move as low as 17.20 if vols subdue, though we think a return below 17.00 is unlikely,” said the bank in a note on Wednesday.
The Peso still has a big “carry” advantage over rivals, says Rabobank, due to the high interest rates in Mexico. This factor is likely to keep demand relatively high.
“MXN remains the most attractive carry currency in the world when adjusting for volatility and liquidity, despite the recent surge in vols,” says the note.
The carry trade is a type of strategy in which investors borrow in a currency where interest rates are low – such as Japanese Yen (Apr. of circa 0.0% - 0.1%) and park their money in a currency with a higher interest, such as the Peso (Apr. of circa 11.00%). The profit in the trade is the difference between what is earned from the interest and the cost of borrowing. In the above example, assuming the Yen does not appreciate against the Peso, the trade would make the investor almost all the 11.00% interest earned in a year.
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