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Goldman Sachs Strengthening MXN Forecasts

MEXICO
  • Goldman Sachs are further strengthening their forecasts which reflect their expectation for the Peso to continue to trade in overvalued territory in the near term and only slowly grind higher over the medium term as the USD gradually weakens from its peak (namely we see USD/MXN at 17.50, 17.75 and 18.00 in 3, 6 and 12 months compared with 18.75, 18.50 and 18.25 previously). All in all, current macro fundamentals suggest that the Peso can continue to deliver strong total returns even if spot appreciation abates after a good run.
  • After COP, MXN is the best performing major currency month to date. And, with a 10% return versus the Dollar YTD, investor discussions are increasingly focused on the Peso’s stretched valuation as a key source of vulnerability at a time when market participants remain worried about US growth and the Banxico has ended its hiking cycle.
  • On the latter point, Goldman Sachs do not think that this is a catalyst for the MXN carry trade to become less attractive given that forward guidance remains relatively hawkish and thus real rates should increase as inflation continues to fall.
  • Instead, GS think the main risk for MXN longs remains a US recession, and for investors focused on US risks, they think adding INR longs offers a more defensive alternative with similar carry-to-vol as MXN but more resilience to US cyclical pricing.
  • All that said, GS do not think that a US recession is imminent under their base case; in fact, with the news flow over the last couple of days pointing to lower US centric risks, MXN has outperformed on crosses.
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