MXN: Cloud of uncertainty over the US / Mexican trade and investment relationship - RBS

Analysts at RBS suggest that the election of Donald Trump creates a cloud of uncertainty over the US / Mexican trade and investment relationship as President Elect Trump has pledged to begin renegotiating NAFTA on his first day in office.

Key Quotes 

“Mexican economic growth has been primarily driven by consumption but has been marred by continued weakness in both investment and exports. While Mexico benefits from a solid US consumer outlook, disappointing business investment in the US has contributed to a lacklustre performance in Mexican business spending. Even if the ultimate result of a NAFTA renegotiation is less punitive than feared, uncertainty could keep investment muted for the foreseeable future and reduce consumer confidence.”

“We expect Banxico to remain aggressive in using rate hikes to counter FX weakness and its potential impact on inflation and inflation expectations. Mexican CPI inflation now sits slightly above the 3.0% target, and FX weakness paired with global reflation risks leave risks of a pickup in inflation expectations and, with it, a dip in consumer confidence. But Banxico must balance its hawkish monetary policy with a softening growth outlook, a risk that may become more prevalent in H2’17. Banxico’s $175bn in reserves leave it poorly positioned from a reserve adequacy perspective.”

“A combination of significant uncertainty over the investment and trade relationship with the US, Banxico’s more limited scope to defend the currency from further weakness as the growth/inflation trade off becomes more acute, and Mexico’s persistent current account and trade deficits leave us bearish on the MXN. We think the pair will again trade to new record highs early next year. Both FDI and portfolio inflows have each been on a downward trend and economic uncertainty may fuel a further slowing in investment that funds the current account deficit.”