The Mexican Peso is not a Buy Just Yet

The Mexican Peso has suffered significant falls over recent months leaving investors wandering if now is the moment to buy and profit on a recovery.

Don't be tempted argue strategists at UBS who urge caution on the Mexican currency.

“Weighed down by fears of protectionism, it (the peso) has moved another 11%. Is this a great buying opportunity? That will depend on what degree of trade protectionism is priced in, and whether future risk-reward is favourable,” says UBS Strategist Bhanu Baweja.

After making calculations using their models the UBS team assess that the devaluation in the Peso is greater than that which would be caused by a 20% trade tariff.

Using rough estimates of the elasticity of Mexican exports to their USD price, UBS research attempted to back out what degree of Peso movement would neutralise any hit to the Mexican trade balance from an imposition of import tariffs in the US.

“We estimate that the peso's movement since Q4 2016, over and above the drift south due to weak fundamentals, has been big enough that it is now already pricing in roughly a 70% chance of a 20% tariff being imposed,” says Baweja.

This indicates that the decline in the Peso has already priced in nearly three-quarters of a 20% trade tariff.

This would be expected to increase the attractiveness of the currency as a buying opportunity, however, UBS remain unmoved, citing “second round hits to the Capital Account” as encouraging a continued bearish outlook for the Mexican currency.

“So, when would we buy the Peso? At the very least, we would wait for a) some clarity on the level and scope of any tariffs, b) for the trade balance build on its recent move into positive territory, and c) some signals on companies' intention to continue their FDI into Mexico,” says Baweja.

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