Although long MXN positions look overstretched by a number of metrics, we are reducing our Q3 and Q4 USD/MXN forecast to 17.50, and 18.00, respectively.

This reflects the continued preference for the MXN amid an environment of rate cuts across the region in the short term but recognizes the large upside risk should a greater divergence in the monetary policy path for the Fed and Banxico materialize. 

We highlight that we expect another 25 bps rate hike (vs. 5 bps priced in by the market) from the Fed in September, while we see risks of a quick switch to a dovish stance by Banxico in Q4 as inflation expectations drop and push the ex-ante real rate towards 7.0% (360 bps above the upper band of the neutral real rate range estimated by Banxico).