NAFTA talks.
There is no way to forecast a possible outcome of these talks. However, given the rhetoric of President Trump on the issue, a fully positive outcome does not seem a probable scenario. Many analysts are forecasting negative scenarios without excluding the possibility of a breakdown in talks soon. According to these sources demands made by the US on key issues are no-gos for Mexico. Goldman Sachs is one of them and expect the US to announce its intention to pull out of NAFTA.
This would cause a shock on #USDMXN and if it is actually carried through it is expected to have a major effect on the Mexican economy as its exports to the US account to approximately 28% of its GDP. This number alone indicates that any negative outcome of NAFTA talks will have a negative impact on Mexico.
There is another political issue between Mexico and the Trump administration, namely the building of a border wall which was very high on the agenda of president Trump prior to the elections. It is obvious that this will also play a role on the US final decision on NAFTA purely because of political reasons and not because it has anything to do with economics and trade. Internal US politics will also play a role on the outcome of NAFTA.
Lastly, the Trump administration has shown that it pushes through many of its controversial pre-election promises in domestic as well as in foreign issues. So dropping NAFTA will not come as a surprise.
FED and Banxico policies
If there was no NAFTA issues it would be very possible to have two very divergent policies.
FED on one side is looking set to continue its path to normalization. A rate hike is expected during this month and many analysts give high probabilities for this to be repeated once or twice next year.
Banxico, without the probable uncertainties that there are in the horizon (NAFTA, and elections), would have to primarily consider the following two factors when determining its rate policy:
The current state of inflation (5,8% aprox average for 2017) and its forecast (3.5% average for 2018 according to the IMF), and,
the forecast of Real GDP growth (IMF gives it at 1.9%) which is actually a decline from that of 2017 (2.1% up to now). (Many other research teams give a similar image on these figures).
So, under normal circumstances, Banxico should start gradually decreasing its rate.
This is not the case though. In its upcoming meeting in December a rate hike is not out of the question but it is not probable. However, as Banxico is quite vocal and loud in its statements, a very hawkish statement is very probable.
For sure there is the determination and the will to support #MXN. But the number of "bullets" is limited. The rate is high in relation to inflation and GDP current states and projections. So it is most likely that Banxico will save its bullets for when they are most needed.
Can a preemptive strike be excluded? No it cannot.
The previous day from the day Banxico will announce its decision, is the FED rate decision. If FED proceeds with the increase and Banxico do the same, lots of volatility is the only certainty and nothing more than that. If FED does not proceed with an increase then the argument would be that a Banxico increase would strengthen even more a relatively strong at the moment #MXN so that it is at a better position for the stormy months ahead. This does not seem likely since it wastes a "bullet" and secures nothing.
US and Mexico economies on opposite paths
The US is widely accepted to retain its current overall positive outlook. No major negative changes are expected during 2018. Real GDP is expected to be the same next year at 2.1% and CPI inflation (q4/q4) to increase to 2.5%
On the other hand the Mexican economy is given a negative outlook by most research teams, in the sense that it will slow down (nothing dramatic but definitely a slow down).
There is an obvious divergence in the outlook of the two economies.
Political situation
Elections are scheduled for July 2018 and as they approach the tones from politicians are going to be increased and the same the volatility of the pair and the pressure on the peso.
If there are negative developments on the NAFTA front, this effect will be multiplied.
And in order to give names to events so to have a clear picture, if Mr Obrador is ahead in the polls this means pressure to the peso and if he prevails in the elections this means even more pressure.
How do all these factors add up?
Well, nothing can be excluded and nothing can be said with the degree of certainty that will exclude speculation.
Before reaching a conclusion, let's see some forecasts from some institutional research teams.
Nomura retains a negative outlook for #MXN mainly due to Trump Politics and NAFTA.
Goldman Sachs relates the price directly to NAFTA and the elections. If NAFTA goes the wrong way (as they believe it is the most probable scenario) #MXN could reach 20-21. If they add up the political risk then they project a value between 22 and 24.
Morgan Stanley suggests that it will range at around 18 for Q1 next year and then climb to 20 where it will stabilize.
CIBC Capital markets sees it between 19.1 and 19.3 for Q1 and Q2 and then ranging above 18.6 for the remaining two quarters.
Scotiabank sees a similar picture. A range around 19 for all quarters.
Credit Agricole is more optimistic for the peso. It sees a range around 18 for the first two quarters and a range around 17 for the second 2 quarters.
BBVA research sees a value of 18.5 for Q1, 19 for Q2, and then a drop to a range of 17.8 - 17.9 for the remaining two quarters.
It is worth mentioning that BBVA considers that the probabilities of a success in the NAFTA negotiations have diminished.
Mathematical models based on statistics and historical data suggest that the price will range between 18.2 and 19.2 for the first semester of 2018 and then gradually drop to 17.30 by the end of the year.
Technical trend analysis shows what was expected. That there is no indication for downwards trend change.
#USDMXN H4
#USDMXN Daily
As mentioned above any conclusion drawn, given the uncertainties that influence the pair will not be without a certain degree of speculation in it.
The probabilities of a successful NAFTA deal are very low.
Politics will add up considerably to the uncertainty and will apply pressure on #MXN
There is a divergence in the projected course of the US and Mexican economies that does not help the peso.
FED will most probably raise the rate at least twice.
But there are two unknown factors:
- In what degree the markets have priced in the above and especially the probable NAFTA failure?
- To what degree Banxico can support #MXN by increasing its rates?
Answering that is speculative.
However, it can be said that there is nothing at the moment to suggest that #MXN will strengthen in the short to medium term.
If FED increases its rate as expected during this month, this will create a momentum and will lift #USD from the stagnation we have seen across the board the last weeks and give it some upward momentum.
My answer to the above two questions, is:
I do not believe that NAFTA is priced in by the markets, and any major negative development will apply considerable pressure on #MXN.
Banxico is likely to act to regulate the pressure of such event, but a rate hike will not revert the course of the pair in the long run that could leaad to a much stronger #MXN
Medium to long term positioning on #USDMXN is long with caution. The pair could enter an uptrend but it could also range with a hawkish bias. A good degree of volatility is to be expected.
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