Fundamental Analysis: Peso Gains on Tariff Deal

The Mexican peso has made an upward movement so far this week against most currencies. The biggest factor in this was last Friday’s news that the USA and Mexico had reached a deal to scrap tariffs on steel and aluminium. Oil was also one of the main drivers, as was Banxico’s decision to hold rates at 8.25% last week. Trade wars and a generally weaker outlook for growth have provided headwinds, though.

The dollar weakened since Monday’s open to around Mex$19.06 at the time of writing. The euro has also posted ongoing losses below Mex$21.26, a fortnight low. Meanwhile the peso has continued its gains against the yen to nearly ¥5.80.

USA lifts steel tariffs

Probably the most important fundamental support for Mexico’s economy and the peso recently is last Friday’s news of the deal with the USA. The two countries and Canada agreed that the USA would remove tariffs on steel and aluminium, effective from noon on Sunday EDT. This news gave strong support to MXN because of the importance of metal exports for Mexico’s GDP.

Furthermore, these tariffs were a significant barrier to agreement on the latest iteration of the North American Free Trade Agreement. The ‘United States Mexico Canada Agreement’ still faces a range of challenges before domestic acceptance in the USA, but this is a step in the right direction as far as MXN and CAD are concerned.

Oil and rates supporting MXN

The Banco de Mexico (‘Banxico’) decided to keep its benchmark rate at 8.25% last Thursday. The bank’s governing committee commented in its statement that growth slowed in the second half of 2018. However, there has been an uptick in most cases so far this year. Banxico wasn’t particularly hawkish, but traders noted the figure of 3.8% for annual core inflation last month. This is still above the target of 3% by a fairly large margin.

Crude oil has held near three-week highs today mainly as a result of ongoing tension between the USA and Iran. Expectations that OPEC will keep holding back supply have also supported crude. The price of oil has a significant effect on the peso because of this commodity’s role in Mexico’s economy: the country produces about 2.5 million barrels of oil each day.

Rates themselves continue to provide strong support to MXN. 8.25% is the highest base rate since 2009. The differential with almost every other OECD/G20 nation makes the peso appealing as part of the carry trade. Mexico’s Índice de Precios y Cotizaciones (IPC) also recovered slightly since last week from the pullback at the beginning of the month. Although the correlation between Mexican shares and currency is not as strong as in some other countries, gains for the IPC do usually provide some support to the peso.

Trade wars and growth could be cause for concern

As highlighted by Banxico last week, the latest bout in the Sino-American trade war is a negative for emerging markets. Although the worst of the trade wars’ effects might be over for the peso, the fact remains that outlooks for growth remain relatively weak. Mexico’s central bank stressed the importance of studying how figures for inflation compare with projections. This might help to determine economic outlook beyond the short term.

Data to overshadow oil and trade this week

The price of crude and news of trade wars will remain in view for traders of the peso this week. However, the range of key data especially on Friday from Mexico is likely to have more of an effect on trading.

Mid-month inflation statistics are due tomorrow at 13.00 GMT. A slight decline is expected for monthly core inflation to around 0.1%. This comes against the previous 0.4%.

Friday’s the main event, though. Among the six releases, three stand out: balance of trade and GDP growth (quarterly and annual). On the whole, the consensus is slightly negative for these figures. Annual GDP growth is predicted to drop by 0.4% to 1.3%.

Peso could extend gains

MXN’s fundamentals in general are quite strong, which could make a continuation of the current upward movement favorable. On the other hand, Friday’s economic releases are very important. Significant negativity from these could drive losses for the peso.

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