USD/MXN: more upside ahead as Mexico’s outlook remains cloudy - BBH
According to analysts from Brown Brother Harriman, the outlook for Mexico remains cloudy and with oil prices softening and political risks rising, they see more upside ahead for USD/MXN.
Key Quotes:
“While markets are no longer panicking about Mexico, the outlook for the nation remains cloudy. The economy is slowing even as price pressures rise, while oil prices are sinking due to supply concerns. Political risks will likely pick up as the 2018 elections approach.”
“The economy is still sluggish as several rounds of monetary and fiscal tightening bite. GDP growth is forecast by the IMF to decelerate modestly to 1.7% in 2017 from 2.3% in 2016, before picking up to 2% in 2018. GDP rose 2.4% y/y in Q4, while monthly data so far in Q1 suggest some acceleration. However, this latest leg down in oil suggests some downside risks to the growth forecasts.”
“Price pressures bear watching, with CPI accelerating to 5.82% y/y in April from 5.35% in March. This is the highest rate since June 2009, and moves inflation further above the 2-4% target range. Food prices are climbing quickly (due in part to spiking avocado prices from a poor harvest), but we note that core inflation of 4.7% y/y is the highest since August 2009.”
“While this supports the case for higher rates, we believe Banco de Mexico will remain on hold at its May 18 meeting. It has already hiked a total of 350 bp since December 2015, and probably would like to pause a bit and assess the situation. If the Fed hikes June 14, then we believe Banco de Mexico will likely follow up with a 25 bp hike to 6.75% at its June 22 meeting.”
“USD/MXN has been unable to reach pre-election lows, with strong support seen around 18.50. Retracement objectives from the January-April drop come in near 19.8250 (38%), 20.2475 (50%), and 20.6700 (62%), while the 200-day moving average comes in near 19.64 currently. With oil prices softening and political risks rising, we see more upside ahead for USD/MXN.”