The Peso's New Year – Medusa or Manna?

That the past year has been a difficult one for the Mexican Peso is not news. Prior to the victory of President-elect Trump, the Peso tracked the fortunes of the U.S. Election, rising in line with positive news for Clinton, and falling with news which favoured Trump. Following Trump's victory the USDMXN exchange rate saw the value of the Peso plummet by around 12%. Hopes for a less volatile trading value between the two currencies were dashed. Today, with the Peso trading around the low twenties, the value of one Dollar on the thirtieth of December being 20.6957 Pesos, analysts are wondering what 2017 will bring for the beleaguered Mexican currency. Will it buck market expectation and rally, or will it continue to lose value? Is the Peso an investment opportunity or the currency equivalent of the Gorgon, with the potential to turn any forex investment into stone?

USDMXN - November 7th - November 18th. Source: Trading Economics

The Case Against

There appears to be a broad consensus that 2017 is not likely to be a good year for Mexico in general, and the USDMXN exchange rate in particular. Analysts from Wells Fargo expect the Mexican economy to enter a mild recession, with a 1.1% drop in real terms GDP, and a 'doubling in the inflation rate for the same year.' Their analysis is based on the belief that much of Trump's bellicose campaign trail rhetoric, at least as far as Mexico is concerned, was not mere smoke and mirrors.

Wells Fargo Analysis of future U.S. policy

Economic Forecast for Mexico (2017)

In addition to gloomy forecasts about the strength of the Mexican economy at large, the Mexican Peso has also suffered from uncertainty in the wake of the resignation of the President of its Central Bank, AgustínCarstens. Immediately following his resignation, the currency closed at a level of 21.05 to the Dollar, a key level of resistance. The Central Bank itself has hiked interest rates over the last year with little major impact, as the effective exchange rate is at its weakest level for over two decades. Furthermore, the Bank believes that changes to fiscal and monetary policies in the U.S. will lead the Dollar to continue to appreciate against virtually all currencies. According to ForexCrunch, some are dubbing the Mexican rate rises, rates now being at their highest level since 2009, an 'unofficial battle to support the currency.'

USDMXN -10 years

A wide range of analysts follow the gloomy forecast for the Mexican economy at large, with a correspondingly grim set of expectations for the Peso's future value.SocieteGenerale expect the Peso to sink further, to a level of 23 to the Dollar, U.S. rate rises in 2017 are expected to bring further bad news, and James Barrineau, co-head of emergent market debt at Schroders, notes of his company: 'we don't own any Pesos.' Further to this, a Nomura Securities survey suggests that the USDMXN rate will hit 26 Pesos to the Dollar by the end of 2017, on the assumption of capital flight, and competitive devaluations. Less alarmist, but still bad news if you have a position on the Peso, is longforecast.com's prediction of an near the end of 2017 exchange rate of between 21.42 and 22.40 Pesos to the Dollar.

Forecasts for USDMXN -1 Year

Debt to GDP - Mexico

If you take the side of the naysayers, it seems that the Peso in 2017 is likely to prove itself a dud investment, with new lows yet to be fully established, and little room for any short to medium term recovery. The U.S. currency is climbing, and Mexico faces a string of difficulties, from rising crime, to falling inward investment, and a rising debt to GDP ratio. From this perspective USDMXN is a currency pair you ought to steer clear of in the coming year.

The Case In Favour

As with all analyses, there is of course a counterpoint to be made. It is true that many organisations predict the Peso will continue to lose value, and that the Mexican economy is not in quite as good a shape as it might be, however there are reasons for optimism.

Mexican Retail Sales.

Mexican Unemployment Rate.

Unemployment is falling, retail sales are rising, inflation is in or around the 3% target, and Trump's hard line with Mexico might easily slip off the agenda in the wake of pressing global issues, such as the raft of diplomatic spats already “kicking-off” prior to Trumps inauguration, including the game of diplomatic brinkmanship which is being played with China. So what we have is a situation with many long-term positives in play for the Mexican economy, where the country's currency is cheap, which might make it very much a time to invest, both in currencies and in equities. Indeed, if Trump does avoid pressing too hard on the Mexican economy in his first hundred days, and with Mexican interest rates likely to rise again, the Peso ought to bounce back strongly in the first two quarters of 2017.

Mexican Interest Rate

Additionally, several Latin American investors and strategists, according to Bloomberg Markets, believe that the Peso is sure to bounce back after its worst sell-off in years. Franklin Templeton's Michael Hasenstab supports this assertion believing the Peso is in line for a 'sharp reversal in 2017.'

BMI Research view on Mexican Peso

Analyst John Benjamin also backs the potential of the Peso to rally, noting that although 'strong gains in the U.S. Dollar might have pushed the Mexican peso to historic lows, […] [t]he monthly chart shows a potential correction over the coming months.' Benjamin notes a broadening wedge pattern in trades of the currency pair, arguing that this signals a medium term correction toward the mid to high teens.

USDMXN Monthly Chart - Broadening Wedge Pattern

Latinamericamonitor.com hosts further analysis backing the Peso to buck market expectations and rally in 2017, as they note their belief that 'market expectations for the Peso are overly negative, especially in comparison with […] [f]undamental assumptions regarding the macro-economy, political reform, and U.S. trade negotiations, as well as several key sectors, such as autos, infrastructure, and energy.' They predict an end of 2017 USDMXN rate of between nineteen to twenty Pesos, a rate which is far more bullish in favour of the Mexican currency, than other consensus forecasts, such as Bloomberg's 20.20.

Forecast.org's more bullish Peso prognosis.

If you're looking to take a risk, the Peso might just be the place to do it. There is mixed analysis, and a strong possibility of at least a medium term rebound in the fortunes of the currency. It may be unlikely that a politically driven sell-off has the legs to last a whole year, and with key support-turn-resistence currently being tested, there is the potential of a break in the next quarter below the 20 Peso mark. Should this occur, John Benjamin's prediction of the mid-teens might not seem so outlandish. As long as previous highs in the USDMXN rate (21.4) are not breached, the currency might just consolidate at a lower level against the Dollar.

As an investment opportunity the Peso is attractive given its cheap valuation, a hawkish Central Bank, and a potentially distracted Trump. As ever it's all eyes on the U.S. President-Elect, but there is a significant possibility that 2017 will be a good one for the Mexican currency.

Alternative Pairs to Track

That the Peso is an interesting proposition is not in doubt, there is money to be made in betting against it, betting in its favour, taking a long position at low prices and waiting for the eventual rise,   and indeed on intra-day rises and falls. It is however noticeable that the U.S. Dollar has gone from strength to strength in recent months, so it might be worth keeping an eye on one or two other currencies paired with the Mexican Peso, either as an investment in themselves, or as a means of hedging your risk, gaining perhaps in triangular trades with the Dollar.

CADMXN

Saxo in its unlikely events forecast notes that, following on from the volatile 2016, the only true certainty is uncertainty. They note that while it might seem unlikely at present, the possibility exists that Canada might suffer a credit crunch in its housing market owing to rising interest rates, and that the country might benefit less than expected from U.S. infrastructure spending, due to the hollowing out of its manufacturing base. In this scenario, should Trump's ability or interest in cracking down on Mexican trade wane, then CADMXN might correct by as much as 30%.

CADMXN - 1 Year.

Additionally, with 2017 likely to be the year in which the commitment of OPEC and international oil suppliers to reduce production levels, in order to bolster the price of oil, is tested, depending on national interest rates, and general socio-economic trends, CADMXN is an interesting pair to track.

MXNCOP

Despite its long-held status as a strong free-market bastion in Latin America, Mexico is slowly but surely coming to terms with the fact that it faces a crisis similar to that faced by Columbia in the 1990s. Drug Cartels and corruption weigh heavily on the Mexican Peso, and with the Columbian Peso backed in the short-term at least by Banco Bilbao, this emerging market currency pair might be one to watch. Politics, more than anything else, ought to dictate rises and falls. MXN has fallen consistently over the past year against the Columbian Peso, with relief rallies seemingly occurring every two months, making this an interesting trade if you're willing to keep a very sharp eye on daily forex movements.

MXNCOP - 1 Year

CFDs, spread-betting and FX can result in losses exceeding your initial deposit. They are not suitable for everyone, so please ensure you understand the risks. Seek independent financial advice if necessary. Nothing in this article should be considered a personal recommendation. It does not account for your personal circumstances or appetite for risk.