USD/MXN to rise back to 20.00/21.00 range if NAFTA ends- RBC CM

If NAFTA ceases to exist, analysts at RBC Capital Markets, see negative consequences for Mexico’s growth, a difficult stage of adjustment and USD/MXN going back to a 20.00-21.00 range.

Key Quotes: 

“The fourth round of NAFTA talks ended this week, with negotiations taking a turn for the worse. The prospect of no more NAFTA is no longer unthinkable.”

“Will USD/MXN go back to 22 if NAFTA disappears? Probably not. In case of a rupture, our view is that MXN could react less violently than what we saw at the beginning of the year (when it USD/MXN reached an all-time high of 22) but still fluctuate within a 20-21 range, as it will also feel the impact of the domestic political calendar.”

“In that scenario, we do not think Banxico would intervene to counter the MXN move. Since Trump was elected, the Committee recognised that changes in the trade relations between Mexico and the US could represent a new economic reality that might validate a real effective depreciation.”

“Banxico has acknowledged the nominal adjustment of MXN as “natural and necessary” given that one of the main roles of a flexible exchange rate is to absorb these kinds of shocks. It is likely that Banxico will adopt a more hands-off approach and allow MXN to trade lower as long as it coincides with the fundamental picture, prioritizing its role as the guarantor of orderly market conditions. Sporadic interventions to “smooth” the adjustment or to provide liquidity if market conditions deteriorate excessively should not be ruled out but the goal would not be to bring the USD/MXN down to a target.”