All Signs Point To Further MXN Upside

The Mexican peso closed above key trendline resistance at MXN12.69/US$ on December 2, setting up an over 12-month high for the currency. We view this as a highly bullish break for the peso, having previously failed to push above this resistance level on four occasions (see chart). The close above the MXN12.80/US$ level chimes with our end-2009 forecast for the peso of MXN12.50/US$, and further underpins our long-held view that the currency remains undervalued. This is despite the ongoing economic recovery still being an unconvincing one, given the country's high reliance on the US economy, and mounting fiscal uncertainty, which has recently led to a ratings downgrade by Fitch. However, although we believe that a ratings downgrade by another agency could be in the offing, we maintain a bullish near-term outlook for the currency.

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