You-Na Park, analyst at Commerzbank, affirms that the newly elected president Andres Manuel Lopez Obrador, created uncertainty before his inauguration that the market is unlikely to digest this so quickly. They see USD/MXN at 20.20 in March 2019 and at 20.00 by September.
Key Quotes:
“The Mexican peso has been under devaluation pressure since mid-October. The main reason is a decision by the newly elected President Andres Manuel Lopez Obrador (also known as AMLO), who will be installed on 1 December. Based on a referendum, he decided to cancel the construction of a new airport (…) For the market, this decision was surprising since AMLO, following its election as president on 1 July, initially struck a conciliatory tone, easing off investors’ concern about the shift to the left in Mexico. Therefore the recent decision caused the peso to depreciate sharply against the USD. The pair is now trading well above the 20.00 level.”
“In December, the central bank is likely to hike once again (…) Next year, we expect the central bank to leave its key interest rate unchanged, as inflation is then likely to slowly decline again. In our opinion, however, it is still too early for a rate cut next year due to domestic political uncertainties. USMCA not yet cut and dried.”
“It could still be a bumpy road until the agreement will be finally implemented, which is to be expected in the course of next year. Together with domestic political risks, this should lead to increased volatility in the peso in the coming months.”
“The peso is likely to remain under devaluation pressure for the time being. Because there is a lot of uncertainty about the political future of the country. Even before the vote in July, a possible election of Lopez Obrador as president was viewed sceptically by the market. Now it seems that this skepticism was justified, and it looks rather as if hopes were premature after the first conciliatory tones of Lopez Obrador. But we don’t want to sound too pessimistic. The left-wing populist views of Lopez Obrador will certainly be noticeable in his political decisions. But we don’t believe it will come to a very significant change regarding the political course of the country.”
“For the peso this means in our opinion that it remains under devaluation pressure for the time being. In the course of next year, the market will probably have become accustomed to the new president’s style, and it will increasingly become apparent that the shift to the left will be moderate. Against the backdrop of a credible central bank and high interest rates, the peso should then recover somewhat.”
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