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Goldman Sachs Say MXN Appreciation Trend Could Slow In Coming Months

MEXICO
  • Goldman Sachs have noted the Peso has moved towards their stronger forecasts faster than they expected so the appreciation trend could slow in coming months. Plus, given the increasingly overweight positioning, MXN longs remain vulnerable to sharp positioning changes on the back of a broader Dollar move, especially if FOMC members start to discuss a more aggressive tightening strategy more openly.
  • In that context, it is also worth noting that MXN remained resilient through the 2022 policy-driven USD strength and, even if spot returns become more range-bound, the Peso’s elevated carry-to-vol still offers an attractive total return, in their view, which can be extracted with non-Dollar funders like EUR.
  • As the market focus has shifted towards the implications of strong US growth and rising US yields, the Peso has reinforced Goldman Sach’s long-held view that MXN is a good long for a longer US cycle.
  • This outperformance likely reflects a resilient combination of low sensitivity to US rate moves (relative to both its own history and to other EMs), a large beta to cyclical growth and a high carry buffer. But, perhaps, the most structural and “MXN-specific” factor behind this outperformance is the ongoing ‘near-shoring’ trend in the United States’ import patterns.
  • In a related point, Mexico’s external balances continue to benefit from fiscal restraint during the pandemic and healthy remittance flows (as suggested by the latest print).
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