Luis Hurtado, analysts at CIBC, warns that negative risk for the Mexican peso could materialize during the third quarter. They forecast USD/MXN at 19.9 by Q4 2019 and at 20.4 by Q2 2020.
Key Quotes:
“The high carry and low volatility embedded in the MXN has made it a favorite currency for investors as advanced economies signal a monetary easing cycle. Although we concur with the theory behind this trade, we disagree with respect to the timing, as risks to public policy and trade are likely to materialize in Q3.”
“Finance Minister Carlos Urzua’s resignation caused volatile USD/MXN trading at the start of July, as Urzua drew attention to discrepancies in economic matters and named unprepared public servants within the ministry. The abrupt move, however, was partially reversed when President Lopez Obrador nominated Arturo Herrera to be the new Finance Minister. This move was well received by the market, as he is regarded as a reasonable voice amongst members of the economic team. Although the market appears to have calmed since then, Urzua’s resignation should ignite further fiscal concerns, as current and future policies being implemented by the AMLO administration are now being questioned. Remember that growth forecasts are continuing to drop this year and now sit closer to 1%, thereby putting pressure on government revenues. Moreover, we still wait to see how the government will deal with PEMEX’s precarious situation, while the USMCA has yet to be ratified in both Canada and the US.”
“On the monetary front, minutes were in line with expectations of a less cautious Banxico, as the output gap widened and inflation dropped back within its target. What’s noticeable is that there is another Banxico member (aside from Esquivel) that suggested cutting rates soon, should inflation continue to converge towards the 3% target. Although the minutes signal a less cautious CB, the statement does not reflect the recent political developments and increasing domestic uncertainty. We regard this with caution, as dovish comments could be reverted as public policies and governance come into play, which should see the MXN depreciate.”
Share
