MXN: We expect underperformance to continue at least for another year - BBVA

According to the Research Department at BBVA, the Mexican peso will remain week and they see Banxico raising rates at the next meeting.

Key Quotes:

“The peso’s outperformance reached a peak in August 2014: the shift from the “Mexican moment” to the major slide in oil prices.”

“Three factors seem to be driving the recent sharp underperformance: i) reduced expectations of US growth; ii) weakening economic fundamentals, particularly related to the external and fiscal balances; and iii) the Trump factor.”

“The MXN’s rough ride may well calm somewhat after the US election, but the external balance points to continued underperformance in 2017. Bottom line: a Clinton victory on 8 November may well calm the MXN’s rough ride and provide a boost to its value by year-end. However, and albeit that result might ease pressures on the peso, once that risk fades away, reality would still be there and the challenging backdrop of a widening current account deficit and potentially increasing difficulties to finance it – portfolio inflows are now needed – are likely to continue to weigh on the MXN in 2017. Therefore, a significant and permanent reversal of recent MXN underperformance might prove difficult. Indeed, we expect the MXN underperformance to continue at least for another year.”

“We now expect Banxico to widen the interest rate spread by 50 basis points (bps) on 29 September. That is, if the Fed holds rates on 21 September, Banxico will increase its policy rate by 50 bps, whereas if the Fed hikes rates (by 25 bps), Banxico will raise its rate by 75 bps. We expect this even though we do not expect any inflationary pressures on the horizon – with very limited FX pass-through and no second-round effects –, we anticipate weak economic growth, and considering that from the perspective of a larger current account deficit, a real depreciation of the peso may be desirable to drive a decline in imports.”