Free Trial

Natwest Favour Short MXNZAR On Valuations Rather Than Elections

EM FX
  • With MXN/ZAR trading close to the highs for the past two decades, the start and scope of respective easing cycles suggests strong downside for the cross, according to Natwest. They target 1.0 from an initial entry level of 1.12 and a stop-loss of 1.16, offering a 1:3 risk-reward.
  • Natwest note that Mexico’s real policy rate is too high for the domestic economic cycle and disinflation and slowing growth justify their expectation of a March start to the easing cycle. In contrast, South Africa’s real policy rate of just 2.85% leaves little room for rate cuts especially with an economy vulnerable to inflation shocks and Natwest don’t expect the SARB to begin easing until September, at the earliest.
  • Natwest think that long peso positioning is very vulnerable to an uptick in global volatility. The peso has traded well as a dollar-proxy, but they expect that to change as carry decreases and some headline risk appears. Some of this risk could come from more heated rhetoric around Mexico (and broader immigration policies) as the US election cycle intensifies, although they don’t expect it to be anywhere close to the dynamics in 2016.
  • Natwest note that market positioning appears to be short ZAR assets and a better-than-expected pre-election budget led to outsized moves in South African assets. After years of fiscal slippage and collapsing basis services, any positive surprise will have outsized impact.

To read the full story

Close

Why MNI

MNI is the leading provider

of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.

Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.