Mexico: Elections and USD/MXN - Nordea Markets

On Sunday, Mexicans will vote at presidential and parliamentary elections. According to Morten Lund, Research Analyst at Nordea Markets, polls suggest that the market-unfriendly, “anti-Trump” Andrés López (AMLO) will win, this could complicate the NAFTA negotiations and spell more trouble for the MXN.

Key Quotes: 

“On the foreign policy, AMLO has on several occasions expressed his discontent towards US president Donald Trump. Markets fear what the combination of two unpredictable presidents may implicate for the NAFTA negotiations. Although AMLO’s NAFTA stance allegedly does not differ much from current president Nieto, and AMLO’s designated NAFTA negotiator recently said a deal could happen in a couple of months, an AMLO win would nonetheless increase uncertainty around NAFTA.”

“There is a risk that AMLO’s party block PMRN/PT/PED will gain more than 50% of the votes in both chambers which consequently would allow AMLO to pass reforms and budgets without the opposition.”

“We do not expect to see any downside pressure on the currency if AMLO wins. This is also already implied by the markets as we have not seen any rise in short-term risk reversals for hedging against MXN depreciation.”

“The tail risk of an AMLO loss (to either Anaya or Meade) would initially result in a MXN rally. However, this would likely be at the cost of massive protests and violence on the streets (much bigger than in 2006), which in turn would somewhat dampen the investors risk appetite for Mexican assets.”

“If AMLO is elected, the 2019 budget proposal will be crucial for investors’ confidence.”

“While the central bank does not officially preserve a particuar exchange rate level, we believe levels around 21-22 for USD/MXN could cause interventions – the same levels as the last time Banxico made any interventions in January 2017.”

“We expect USD/MXN to remain close to current levels short-term due to a strong USD, shaky EM environment and political risks, whereas the central bank on the other side will not allow the currency to get much weaker. In the medium to long-term, we see the political risk premium fading, fundamentals improving and the USD weakening. This should consequently help the - from a pure PPP perspective - highly undervalued MXN.”