MXN: Anatomy of a downfall – Deutsche Bank

In view of the research team at Deutsche Bank, the current devaluation of the MXN is almost unprecedented in both nominal and real terms.

Key Quotes

“While there is scope for a cyclical recovery of the MXN, we identify structural elements in Mexico’s economy that are likely to limit the extent to which the USD/MXN can rebound. Trade-related market drivers of the MXN such as the CNY are likely to be a drag on the peso. Financial-related drivers of the currency such as the DXY are also likely to weigh on the MXN. Structural changes in the oil market, the increased sensitivity of the MXN to Mexico’s oil production, and the persistent oil trade deficit should also prevent a significant appreciation of the MXN. Finally, in the very long term we believe that the MXN weakness is likely to persist due to the surprisingly weak trajectory of Mexican productivity.”

“A rebound of the USD/MXN is likely but we believe it would not be lasting. At this juncture we express our view regarding the fundamental weakness of the MXN by being short via options. The ongoing uncertainty regarding US future trade policy, Mexico’s declining oil production, and the emergence of political and social noise as salient domestic risks underpin our relatively bearish view on the currency. We favor owning USD/MXN calls and suggest adding RKIs or WKOs overlays to cheapen the trade.”