USD/MXN: recent developments are positive for the Mexican Peso - BBH

According to analysts from Brown Brother Harriman, the recent FX program from Banxico, an improvement in the risk environment and better-than-expected signals from the relationship between Mexico and the US, are positive factors for the Mexican peso (MXN). 

Key Quotes: 

“Banco de Mexico announced a new FX program to help support the peso without draining its foreign reserves.  While this should help lower FX volatility near-term, the peso is benefiting more from a more benign EM backdrop and signs of thawing US-Mexico relations.”

“Comments today from US Treasury Secretary Mnuchin regarding Mexico should be viewed as constructive.  This stance would support the view that a less confrontational stance will be seen, despite President Trump’s inflammatory campaign promises.  Mnuchin said that he was not worried about US-Mexico trade relations, calling it a “win-win” result for both countries.  He added that we shouldn’t expect action on US-Mexico trade in the short-term.”

“The economy is still sluggish.  GDP growth is forecast to decelerate modestly to 1.6% in 2017 from 2.3%% in 2016. (…) Price pressures are rising, with CPI accelerating to 4.7% y/y in January.”

“Banco de Mexico just announced a new $20 bln FX hedging facility.  Long story short, this is very much like the swaps program used by Brazil.  This should allow Banxico to limit the impact of hedging demand on deliverable FX.  The central bank takes on FX risk but pays out in local currency so there is no drain on its FX reserves.  Any FX losses will be absorbed by Banxico, but it has been profitable over the last several years.”

“A key level for USD/MXN comes in near 19.6435.  This is the 62% retracement objective of the big November-January move higher.  A break below would target the November 9 low near 18.1635.  The 200-day Moving Average comes in near 19.5140.”