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Mexican Peso Outlook Bearish as Virus-Led Recession Risks Swell

Mexican Peso Outlook Bearish as Virus-Led Recession Risks Swell

2020-04-12 04:00:00
Dimitri Zabelin, Analyst
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USDMXN Price Chart

Source: IG Charts

MEXICAN PESO OUTLOOK: BEARISH

  • Mexican Peso faces severe selling pressure as US economy flirts with a recession
  • USD/MXN volatility may be amplified by slowdown in emerging market economies
  • IMF GFSR, World Economic Outlook reports could spark risk aversion, hurt MXN

Mexican Peso Suffers as Recession Fears Swell

The cycle-sensitive Mexican Peso may fall if recession fears from the coronavirus pandemic continue to undermine the global growth outlook. The discussion among policymakers has recently become less about whether there will be a downturn and more about its depth and duration. In the US, initial jobless claims have reached unprecedented heights as millions file for unemployment benefits amid the nation-wide lockdown.

Chart showing US initial jobless claims

The United States accounts for over 80 percent of Mexico’s total exports, so weaker demand from the world’s largest economy has significant consequences for its Southern neighbor. If economic data out of the US continues to reinforce fears of a deep recession, the growth-oriented Mexico Peso will likely face aggressive selling pressure.

Chart showing US-Mexico Trade

Besides the prospect of weaker bilateral trade, MXN faces additional pressure as an emerging market currency that frequently oscillates with global changes in sentiment. On the other hand, the US Dollar may rise as investors flock to highly-liquid assets if risk appetite sours. In the current environment, extreme moves in USD/MXN should not be ruled out. Since, the start of March the pair is up over 20 percent.

USD/MXN, Confirmed Coronavirus Cases in US and Mexico – Weekly Chart

Chart showing USD/MXN

USD/MXN chart created using TradingView

Mexican Peso May Fall on IMF World Economic Outlook, Financial Stability Report

The International Monetary Fund (IMF) will be releasing its World Economic Outlook report along with its bi-annual Global Financial Stability Report (GFSR) on April 15. It is likely these reports will cast a dark shadow over future growth prospects and will focus on the short, medium and long-term outlook impact of the coronavirus pandemic.

The report will likely cite instability in the multi trillion dollar corporate debt market and the stability of so-called leveraged loans. In March, investor angst saw the spread on credit default swaps (CDS) for insuring sub-investment grade corporate debt skyrocket to levels not seen since the 2008 recession and Eurozone debt crisis. In this period, emerging market FX plunged vs the anti-risk US Dollar and Japanese Yen.

While junk bonds have experienced their biggest rally in almost two decades after the Fed announced it will now purchase those risky securities, resurgent risk aversion from a credit crisis is not off the table. Countries and corporations continue to experience credit downgrades as the deteriorating fundamental outlook casts a shadow of doubt over governments’ and firms’ abilities to service their debt.

MEXICAN PESO TRADING RESOURCES

--- Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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