Mexican Peso Likely To Trend Lower In H221

• The Mexican peso (MXN) will depreciate against the US dollar in H221, due to shifting expectations around the US Fed policy compared to a still accommodative Banxico in the short term, and investor uncertainty over economic policy direction in Mexico. 
• After a strong rebound from Q2 2020’s all-time lows, the peso has seen notable volatility in H1 2021, facing pressure from rising long-dated US bond yields in March. 
• Over the longer term it is forecast that the currency will modestly depreciate, weighed down by relatively weak economic fundamentals, such as low investment. The average exchange rate is expected to be MXN20.30/USD in 2021, slightly weaker than its previous forecast of MXN20.12/USD, to account for recent volatility. The unit will likely trade sideways to MXN20.50/USD at the end of 2021 and MXN20.80/USD at end-2022. 
• This depreciation will likely increase the value of debt held by corporates such as PEMEX which are heavily indebted and possess a large concentration of US denominated debt, making repayment more challenging, exacerbating poor liquidity issues.

(Source: Fitch Solutions & NCBCM Research)