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Deutsche Bank Expect USDMXN To Trade Around 18.0 In Short-Term

MEXICO
  • Deutsche Bank expect USDMXN to trade around 18.0 in the short run, and the peso to regain strength insofar as policy uncertainty eases. Although DB see a technical shake-out of positions, they do not expect a reversal of the structural, long-term trend due to indications of continuity in the cabinet and policymaking, Banxico’s cautious stance, near-shoring and a solid BoP position. The main near-term risks stem from heavy positioning and overvaluation.
  • DB expect investors to wait for the final election results and signals from the president-elect before making changes to core positions. Policymaking will likely show a mix of market-unfriendly reforms and pragmatism to preserve ratings and contain peso depreciation.
  • In the fixed income market, value is concentrated in the belly of the curve, in DB’s view. The 1Y IRS risk-neutral rate 5Y forward is hovering near 11%, which with inflation expectations at 3.5% implies a real neutral rate of 7.5%, in line with Brazil, where fiscal accounts are worse. DB see a slow fiscal adjustment that will be sufficient to preserve Mexico’s investment grade. They favour receiving 5Y vs. US as this spread looks too high.
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