The analysis team at Natixis suggests that the MZN equilibrium level is 17.7 vs. USD as of April 2017 based on their developed model, where they first explain the real effective exchange rate (REER) with terms of trade (TOT), 5Y CDS and productivity differential between Mexico and the US and then they use their fitted REER to gauge a USD/MXN level.
“Looking forward if the inflationary shock dissipates and if the rest of the variables remain at the same level, the fundamental value should converge towards 17 vs. USD. However, if we have tougher terms of trade with the US, the fair value should weaken. We estimated a level of 21 vs. USD (including a 20% shock in terms of trade) when the fair value was at 18. Assessing the future inflation and terms of trade scenario will be particularly important for the MXN medium-term outlook.”