MEXICAN PESO KEY POINTS:
- The Mexican peso fails to recover against the U.S. dollar[1] despite risk-on mood, as emerging markets remain vulnerable to the delta variant of the Covid-19 virus
- Near-term USD/MXN[2] volatility could increase significantly if negative COVID-19 stories begins to dominate the news cycle
- However, once market anxiety begins to dissipate, the economic recovery narrative could regain traction, boosting EMFX
Most read: Wall of Worry Builds as Financial Markets Focus on Delta Variant - Market Minutes[3]
The Mexican peso fails to recover and weakens 0.2% to 20.12 per dollar on Tuesday, following a sharp sell-off in the previous session. As a reminder, the USD[4]/MXN exchange rate soared 0.8% on widespread risk aversion and a sharp drop in oil prices[5] on Monday, induced by concerns that global expansion will weaken in the face of rising cases of delta-variant coronavirus around the world. Investors fear that the more transmissible mutation of the virus will lead governments to reimpose mobility restrictions, denting the pace of recovery.
Generally speaking, EMFX needs a healthy and stable economic backdrop to perform well against the greenback. Any sign of weakening growth or challenges ahead can hurt risk sentiment and drive demand for defensive positions.
All things considered, headwinds appear to be developing for the EMFX complex in the near term. In the coming weeks, as Covid-19 delta strain infections increase, pandemic-related headlines are likely to dominate media coverage, unnerving investors. This may trigger strong volatility and sporadic bouts of MXN selling. In fact, one-month implied volatility for USD/MXN hit 11.5% today, a four-week high, a sign that price action may be poised for a big move soon.
It remains to be seen whether the delta variant will derail the global
