Peso Weakness to Continue

The Mexican peso will continue to underperform among most of its peers in the emerging markets, according to the results of a Bloomberg survey released on June 28th. And sure enough, the central bank, Banco de Mexico (Banixco), surprised the markets on June 30th with a higher-than-expected rate hike of 50 basis points–the market was pricing in 25.

The Bloomberg poll results come from more than 120 foreign exchange (FX) corporate and sales executives, traders, and strategists, who attended Bloomberg´s FX16 Symposium on June 22 in Mexico City. Bloomberg brought together the Mexico FX community to discuss the challenges and opportunities in the FX market, which is faced globally by increasing regulations and volatility. How to move forward in FX electronic trading in the second half of 2016 was also discussed.

Key Takeaways

* 57 percent said that the Mexican peso (MXN) will “continue to lag against its emerging market counterparts” and is poised for further declines by year end; 19 percent said that the Mexican currency´s loses have been excessive, but they expect it to recover; while only 11 percent say the worst is over and the MXN will end the year with little changes.

* 45 percent of respondents say that the MXN is undervalued and the fair value of this currency should be between 15 and 17 pesos per USD.

* When asked about the measures taken by Banxico to control MXN´s volatility, 37 percent said USD auctions have helped short term stabilization, but are not effective for the currency´s medium and long term. 35 percent said the intervention has had a marginal impact, and 23 percent pointed out that it has had little effects. Only 5 percent of the respondents said that Banxico has been a crucial player in supporting the MXN and calming volatility.

* Regarding the factors that generate the largest hurdles for exchange rate management among Latin American companies, almost a half of the panel (48 percent) pointed to the management of exchange exposure, while 25 percent said its currency hedging.

* When asked about a target level for the peso, some banks expect the MXN to close the year near 15 pesos per dollar; others estimate it could reach the 20 pesos.

“Bloomberg Mexico is gratified that the FX community came together with us to discuss the market and how we will face the challenges that lie ahead,” said Mariana Suarez, Bloomberg Business Executive for Mexico and Central America. “We will be working closely with our clients to provide them the data, intelligence and tools they need to be effective in moving forward in this challenging environment.”

The high-level event brought together market executives including Daniel Becker, President & Director General of Grupo Financiero Mifel; Ociel Hernández Zamudio, Economist & Chief Strategist of BBVA Bancomer; Alejandro Padilla, Director of Fixed Income Strategy and Exchange Rates at Banorte; Eduardo Suarez, Director of Foreign Exchange Strategy Latin America fore Scotiabank; and Joel Virgen, Vice President of Market Analysis at Banamex.

On July 5th,  the Mexican peso posted the world’s biggest decline as investors continue to grow increasingly pessimistic about the outlook for global growth following the U.K.’s decision to leave the European Union amid its ongoing political strife.

“Although the magnitude of the (Banixco) move came as a surprise to us, the rationale outlined by Banxico in its statement was in line with our view that the Bank has a pre-emptive reaction function and that it would raise rates to discourage peso selling and provide support for the currency,” Christian Lawrence, senior market strategist with Rabobank wrote in a note to clients.

Looking ahead, there is little reason to expect Banxico to follow this move with further hikes in the coming months unless we see USD/MXN rallying rapidly back up through 19 and towards the all-important 20 handle that has never been breached.

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