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Goldman Sachs Say MXN Resilience Could Return

MEXICO
  • Goldman Sachs have noted that MXN has been more volatile more recently as rising long-end US yields have raised concerns about policy overtightening and hit risk sentiment. They add that a couple of idiosyncratic developments have likely also impacted the Peso negatively which include Banxico’s announcement it is gradually reducing its FX hedging programme and the sudden change to airport tariff regulation by the government.
  • GS believe that both these factors should have a limited impact on the currency and the Peso could return to trading resiliently relative to other EM currencies given the current market backdrop.
  • With US activity data remaining resilient and the Fed communicating a more careful stance, this is the type of macro environment where the Peso should outperform on crosses. Plus, valuations now are less stretched, it continues to feature one of the highest levels of carry in EM FX and is backed by a central bank that remains squarely hawkish in the face of a clear disinflation trend and activity resilience.
  • As such, under Goldman’s baseline forecasts, they think the Peso has room to deliver positive total returns in coming months, with an additional contribution from the spot component given current levels. GS would favour pairing a positive MXN view with another risk-sensitive funding currency (such as the GBP or AUD) to help mitigate some of the risk beta.
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