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China Trade, Mexican Remittances & Cautious Banxico Working in Favour of Peso Rebound

MXN
  • Several factors have bolstered the MXN outperformance in recent years. Dominating this discussion remains the attractive carry profile, owing to the very cautious stance of the central bank. Stubborn above-target inflation has prompted the need to maintain the high policy rate, allowing real rates to stay elevated and the peso to remain attractive for investors.
  • Furthermore, expectations of the nearshoring thesis boosting FDI & future exports continue to underpin MXN fundamentals, and the structural rise of remittances to the domestic economy has been providing an additional tailwind.
  • Post-election speculation over potential changes to the constitution spooked markets and prompted a significant correction lower for the Mexican peso, likely exacerbated by a USDMXN positioning squeeze. However, president-elect Sheinbaum’s initial commitment to policy continuity as well as the underlying factors may continue to support the fundamental attractiveness of the peso.
  • Exploring further, China exports to Mexico (in USD terms) have more than quadrupled since shortly after the onset of the pandemic, and have increased at a rapid rate in recent months.
  • While the U.S. has been working to restrict trade and investment with China, Canada and Mexico have opted not to take the same approach. For example, Mexico does not have an inbound investment screening regime and Canadian and Mexican tariffs on Chinese imports are in many cases significantly lower than U.S. tariffs.
  • These differences appear at odds with the open trade relationship under USMCA and have allowed Mexico to benefit from China undermining US restrictions. While this remains an elevated source of economic and political tension, it remains a supportive component for a deeper MXN recovery

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  • Several factors have bolstered the MXN outperformance in recent years. Dominating this discussion remains the attractive carry profile, owing to the very cautious stance of the central bank. Stubborn above-target inflation has prompted the need to maintain the high policy rate, allowing real rates to stay elevated and the peso to remain attractive for investors.
  • Furthermore, expectations of the nearshoring thesis boosting FDI & future exports continue to underpin MXN fundamentals, and the structural rise of remittances to the domestic economy has been providing an additional tailwind.
  • Post-election speculation over potential changes to the constitution spooked markets and prompted a significant correction lower for the Mexican peso, likely exacerbated by a USDMXN positioning squeeze. However, president-elect Sheinbaum’s initial commitment to policy continuity as well as the underlying factors may continue to support the fundamental attractiveness of the peso.
  • Exploring further, China exports to Mexico (in USD terms) have more than quadrupled since shortly after the onset of the pandemic, and have increased at a rapid rate in recent months.
  • While the U.S. has been working to restrict trade and investment with China, Canada and Mexico have opted not to take the same approach. For example, Mexico does not have an inbound investment screening regime and Canadian and Mexican tariffs on Chinese imports are in many cases significantly lower than U.S. tariffs.
  • These differences appear at odds with the open trade relationship under USMCA and have allowed Mexico to benefit from China undermining US restrictions. While this remains an elevated source of economic and political tension, it remains a supportive component for a deeper MXN recovery