Mexico: High uncertainty is exerting pressure on the peso - Commerzbank

You-Na Park, Analyst at Commerzbank, notes that the Mexican economy has already cooled this year, and this trend looks set to continue in 2017.

Key Quotes

“Donald Trump’s election as US President is a significant factor of uncertainty for the Mexican economy. It is still not clear which of the announcements he made during the election campaign will really be implemented. But Mexico’s foreign trade (renegotiation of NAFTA) and immigration will be affected in some way. Due to the high budget deficit, fiscal policy has little leeway for economic stimuli. Whereas, on the one hand, the weak peso supports Mexico’s exports, the Mexican central bank, on the other hand, will have to continue its restrictive monetary policy to prevent a notable increase in consumer prices due to a weak peso. This will weigh on private consumption – an important pillar of economic growth. All in all, we expect GDP growth to slow further to 1.6% in 2017.”

“Further rate hikes in view

The weak peso and the central bank’s concern about the impact on inflation have prompted the central bank to raise its key rate by 200bps this year. It will probably continue its restrictive policy next year, with regard to the rate hikes by the US Fed, because it would otherwise risk a much weaker peso and therefore higher inflation. Should the environment be more conducive to the peso, the central bank would probably consider smaller rate moves or longer pauses, to avoid putting too much of a strain on the Mexican economy. However, uncertainty should remain high in connection with the beginning of Donald Trump’s presidency as well as US monetary policy. We therefore expect further significant rate hikes for 2017. These should enable the central bank to keep inflation in check. We are reckoning with a small increase in the inflation rate to 3.4%, which would be slightly above the central bank’s inflation target of 3%.”

“MXN should not collapse again but will probably weaken further

A collapse of the peso against the USD followed Trump’s election victory. We assume that the resolute reaction of the Mexican central bank will be sufficient to prevent another plunge of the peso. But it is unlikely to avert further peso weakness, as the environment is too unfavourable. We expect the peso to depreciate to 22 against the USD over the course of next year.”