Societe Generale’s Kenneth Broux notes that Latin American currencies have weakened as the Dollar rebounds, with USD/MXN and USD/BRL breaking above key hurdles at 17.50 and 5.20. The bank points to 200-day moving averages near 17.78 and 5.25 as next upside levels, while markets price around 70 bp of Banxico tightening over 12 months to preserve a policy buffer versus the Fed.

LatAm FX pressured by stronger Dollar

"LatAm currencies have not escaped the force of the resurgent dollar. The MXN and BRL backed up above key hurdles of 17.50 and 5.20 respectively for the first time in almost three months and puts loftier levels in play around the 200dma at 17.78 for USD/MXN and 5.25 for USD/BRL."

"Banxico is overwhelmingly expected to leave its policy rate unchanged at 6.50% today. It signalled at the last meeting that policy easing is effectively over."

"Money markets firmly believe the next move in rates is up. Mexico has a history of shadowing US monetary policy and maintaining a buffer is prudent in the even the Fed were to tighten."

"The gap between Banxico rate and the upper boundary of FF target range is currently 275bp, the lowest in a decade and compares to a median spread of around 550bp."

"The money markets are pricing about 70bp of tightening over 12 months and any attempt by the central bank to play down future tightening could temper dip buying interest in the peso."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)