USD/MXN Peso Caught in Profit Taking Ahead of NFP

The Mexican Peso lost more than 1% on Tuesday according to the OANDA Currency Volatility Chart after market participants sold their positions ahead of Friday’s Non-farm payroll report. Emerging markets have been hit by the wave of tapering comments that started with Ben Bernanke and have been contradicted, explained and clarified by members of the Fed. The end of June and the first day of July brought some strength back to EM currencies, but Tuesday’s trading session saw them fall against the USD.

Mexico has strong fundamentals and will be a direct beneficiary from a sustained US recovery. Political reform was the long-standing obstacle for Mexican growth, but the current government has pushed through important structural changes with a promise of more to come. Growth has slowed down, but less than other similar economies and not surprising given the global lack of growth as the European crisis continues and the Abenomics experiment is to early to call.

June marked a losing month for the Mexican currency that had gathered some steam in the first quarter of the year as an under performer ready to take off. The Fed tapering comments took the air out of the emerging markets. Investors who had been looking for higher yields in EM sold their positions. The commitment of Traders showed a drop of 76% of future Peso contracts as the popularity of the MXN trade lead to a painful unwind.

The current price of 13.07 is still far from the one year low of 14.44 in June of last year but its a disappointment to traders who bought into a promising recovery story.

The Fed continues to wait for employment for guidance on its monetary policy. Friday’s Non Farm Payroll report will also determine emerging markets trends as investors will adjust their strategies based on their interpretation of the Fed’s monetary policy.

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