Kamakshya Trivedi, Research Analyst at Goldman Sachs, explains that the Mexican Peso has been by far the best performing EM currency against the Dollar over the past month, and in the process it has moved to their much-stronger-than-forwards forecast of 19 for $/MXN faster than anticipated.
“The MXN shares some of the characteristics of ‘good carry’ currencies – a high real rate, improving external balances and a credible policy framework that should help contain the surge in inﬂation. The most recent data indicate that the sharp falls in conﬁdence surveys in January are abating and that fundamental improvements in the non-oil trade balance in Mexico are now also being reﬂected in the overall current account deﬁcit, which should be supportive for the MXN. Moreover, even with the recent rally, our analytics imply that the MXN offers one of the best combinations of real carry and valuation, so there is room to compress the risk premium further.”
“On a macro basis as well, the MXN has signiﬁcant ‘catch-up’ potential relative to its historical sensitivities to global macro factors such as US growth, oil prices and rates. Since mid-2016, however, the MXN has underperformed as US election and related concerns over trade policy began to move centre-stage and, as a result, there is signiﬁcant room for the MXN to catch up to a stronger US and global growth picture if the worst-case scenarios on trade protectionism are avoided.”
“Revising our 12-month $/MXN forecast stronger to 18 from 19 previously. Notwithstanding the strong macro case for MXN appreciation, it is the shifting rhetoric on trade policy with respect to Mexico which has been the real catalyst for $/MXN moving lower over the past month. While we do expect the US administration to formally commence the process that leads to a renegotiation of the NAFTA agreement, our view has been that the existence of cross-border integrated supply chains and efﬁciency-enhancing intra-industry trade with Mexico would ultimately push against major disruptions to those trade ﬂows. At the current juncture, a stronger Peso would also be aligned with preferences on both sides. The desire of Banxico to keep inﬂation anchored at low levels is partly behind the announcement of a well received hedging programme of up to US$20bn through NDFs, and a stable or modestly appreciating currency should help in that effort and lead to a ﬂatter curve as inﬂation moderates down the line.”
“The US administration would also prefer to avoid a deep undervaluation of the MXN versus the USD, and that has likely played a role in moderating the rhetoric. Comments from Commerce secretary Ross indicated that a “sensible trade agreement” would cause the Mexican Peso to recover, and even Peter Navarro – arguably among the most protectionist-leaning of President Trump’s trade advisers – has been quoted as saying that the “US wants Mexico and Canada to unite in a regional manufacturing ‘powerhouse’”. As these comments suggest, and as the formal NAFTA renegotiation process gets underway, there is likely to be a greater recognition of the mutually beneﬁcial aspects of US-Mexico trade, and we would expect the MXN to continue its process of reconnecting to its macro and valuation fundamentals.”
“Accordingly, we are further strengthening our $/MXN forecasts to 19.25, 19 and 18 in 3, 6 and 12 months, from 20, 19.5 and 19 previously. This leaves our 12-month forecast comfortably stronger than forward pricing and still with a buffer to a fair value of around 17 (based on the average of our GSDEER and GSFEER metrics).”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.