MXN: Outlook has improved, but is still skewed towards weakness during 1H - ING

Gustavo Rangel, Research Analyst at ING, suggests that Banxico rate hikes could be avoided if the peso surprises, relative to their base-case scenario, and strengthens materially in the coming months.

Key Quotes

“Banxico lists the FX pass-through as the second most important driver for policy decisions, and the likely postponement of the deadline for the conclusion of NAFTA negotiations should be supportive of the MXN as it would show that a negotiated compromise is still seen as viable, sharply reducing the likelihood of an imminent US pull-out from the negotiations.”

“Overall, the balance of risks still point to a weaker currency in the coming months but, as NAFTA worries move to the backburner, FX catalysts should turn increasingly to politics and economic fundamentals. In particular, investors should focus on the risk of a victory by left-leaning candidate Lopez Obrador (AMLO) on July 1, and what that would mean for the outlook for energy sector policies. Still, assuming NAFTA-related headline risk dissipates, at least for now, we expect the peso to follow a slightly stronger trajectory than we had previously expected (ie, rising towards 20 instead of 21-22), even if AMLO maintains his leadership in the polls.”

“After the July 1 Presidential election, and assuming a market-friendly result in the presidential race, or the announcement of a market-friendly economic plan by AMLO, the currency could gradually retrace back towards its medium-term fair-value. That value would be closer to 18 if NAFTA survives and closer to 20 if the treaty is abandoned.”

“The stronger peso, and the more comfortable inflationary path expected for 2H18 should meanwhile pave the way for Banxico to start considering rate cuts, later in the year. But prospects for continued hikes by the Fed should keep Banxico cautious and limit the scope of any monetary easing cycle in the foreseeable future.”