MXN: Difficult to spot value until the dust settles - Nomura

Analysts at Nomura note that the Mexican peso has taken a beating in the last few months and they still believe that it is not a buy because of significant uncertainties ahead.

Key Quotes

“Even looking at risk-reward adjusted measures, it is still very difficult to gauge either the expected return or volatility because of significant downside risks. In addition, a swift rally is unlikely in the short term as there is no clear or quick resolution on US trade policy.”

“While the premium already embedded in MXN may look attractive, trade policy with the US needs to be clearer before we can start looking for value. The next 100 days could still offer surprises that should quickly affect FX and rates. But this is only the straightforward, albeit adverse, part of the puzzle. Prior to the turn of the year, we had expected the bulk of the trade adjustment to be largely achieved through “trade restrictions” mostly on the Mexican side and how their exports would enter the US. A surprise step-up in rhetoric by Mr Trump via Twitter, targeting US corporations has provided new information on how his “better deals” could take shape. The market reaction suggests this is both unexpected and not priced in.”

“We think there could still be some unpleasant surprises as several industries other than the automotive sector or regulations affecting the mobility of capital or labour remittances have not been discussed yet, but could pose negative risks. Although we do not suggest this will be the ultimate case, we need to identify room for MXN downside if those negotiations materialise. NAFTA survival (partial or a renegotiated version), the elephant in the room, is still yet to be seen as Mr Trump needs to provide clarity on his attitude towards any changes to this trilateral agreement.”

“On the domestic front, recent MXN weakness and higher interest rates reveal additional vulnerabilities. Not only is growth expected to take a hit, but politics could come into play much sooner than expected for the 2018 presidential election. AMLO, the leader of the MORENA party, could be one of the main beneficiaries of the government’s declining popularity. Last but not least, foreign-domiciled accounts holding local securities (portfolio flows) have more than funded the current account deficit in the past few years. If adverse (local and external) conditions are prolonged, we see the risk of some position liquidation. If this hypothetical situation arises, further MXN weakness will likely emerge.”