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Mexican Peso: Bullish Trends Continue

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.By Win Thin for BBH FX Strategy

NEW YORK (BBH FX Strategy) ---Developments continue to be bullish for Mexico and Mexican peso.

USD/MXN appears on track to test strong support at the 13 level, but much will depend on market sentiment. MXN is one of the top EM performers during this bout of risk on trading, up 6% year to date vs. USD.

While we are constructive on the peso longer term, we acknowledge a growing risk of a correction higher in USD/MXN if the 13 level holds. However, any ensuing peso weakness should be viewed as a buying opportunity for an eventual move below 13 that would then set up a test of Fibonacci levels from the July-November rise in USD/MXN around 12.945 and then 12.62.

Given what we see as a basically hands off policy with regards to the exchange rate when MXN is appreciating, we see more potential upside for MXN compared to, say, BRL, where Brazilian authorities are clearly going to work against further currency strength.

Others in Latin America are concerned with currency strength, including Colombia. As such, going long MXN vs. BRL or COP would be a good alternative, too. On the other side, Banxico has installed circuit-breakers to help boost peso liquidity during times of stresses as part of an effort to prevent disorderly downside movement in the peso.

The external position is conducive for peso gains. The current account deficit is seen staying fairly steady at around -1.0% of GDP in 2012, same as 2011, and this gap will be almost entirely covered by FDI. Current account performance has been helped by strong overseas worker remittances, perhaps reflecting in part the recent strength in the U.S. data. With the U.S. economy being one of the few bright spots this year in the global economy, Mexico should be the beneficiary of increased foreign portfolio flows into the Bolsa due to Mexico's exposure to the U.S.

The political landscape could become more conducive for long-term structural reforms in the economy, while higher-than-expected inflation readings in recent months have gotten tongues wagging about potential Banxico tightening, instead of easing.

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