Carry proposition for MXN still intact, although headwinds have been strengthening, economists at Société Générale report.
MXN valuations in an EM context
Strong growth outperformance and progress on inflation containment have helped MXN to eclipse the EM currency complex this year. However, headwinds are accumulating from currently rich valuations, shift in Developed Markets rates paradigm, and changes to domestic policies regarding currency intervention.
We highlight key features of the Mexican Peso’s outlook over the coming quarters, in a comparative context: Robust returns anticipated over the next 12 months, particularly in terms of total returns. Real policy rates are likely to remain sustainably high over the next year. Currency carry profile compares favourably with most other EM currencies. Carry-to-vol is still compelling. Limited financial market spill-over into MXN from China woes. Portfolios flows may not provide much of a boost to MXN valuations until the US rates picture stabilise. FX options market reflects already highly bearish MXN positioning. REER model signals MXN valuations as rich, but for this particular currency, the relationship with spot exchange rates is modest.
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