USD/MXN: The global liquidity story has turned more positive for EM - BBH

Analysts from Brown Brother Harriman, forecast the USD/MXN pair at 19.00 by Q3 and at 19.50 by Q4 and 20 by the first quarter of 2020. They are turning a little more constructive regarding Emerging markets but warn that more needs to be seen. 

Key Quotes: 

“The Mexican economy remains sluggish. GDP growth is forecast by the IMF at 1.6% in 2019 and 1.9% in 2020 vs. 2.0% in 2018. GDP rose only 1.2% year over year in Q1, matching the cycle low from Q1 2018. As such, we see downside risks to the growth forecasts. Indeed, Banco de Mexico recently cut its growth forecast this year to 0.8-1.8% from 1.1-2.1% previously.”

“Banco de Mexico has been on hold since its last 25 bp hike to 8.25% back in December. CPI edged lower to 4.0% year over year in mid-June, back to the 2-4% target range for the first time since March. Bloomberg consensus sees an easing cycle starting by Q1 2020, but much will depend on external conditions and the peso.”

“The ratings agencies are punishing Mexico. Fitch recently cut Mexico one notch to BBB with stable outlook while Moody’s cut the outlook on its A3 rating from stable to negative. Our own sovereign ratings model has Mexico’s implied rating at BBB/Baa2/BBB and so we are not at all surprised by Fitch’s move. What we are surprised at is that Moody’s still has Mexico at A3.”