LATAM FX Talking: The mighty Mexican peso endures
The past month was again, a very good month for the Mexican peso, which was the top performer across EM. The currency’s high carry continues to be an effective anchor but the peso really stands out for not being a commodity currency at a time when its regional peers are facing headwinds from the coronavirus and its impact on Chinese demand and commodity prices
Executive summary
Much like over the past month, other currencies in the region should continue to react to risk-aversion trends resulting from market reaction to the evolution of the coronavirus outbreak and its impact over commodity prices and the USD.
The eventual de-escalation of this threat would help consolidate a more constructive environment for global growth, and potentially a bigger catch-up rally from the currencies that have sold off the most more recently, notably the BRL and the COP, when compared to the more muted reaction seen in the CLP and the PEN, which have followed a lower volatility path.
Taking a longer-term perspective, we believe the scope for the MXN to outperform should be constrained by the fact that Mexico’s rate differential with the rest of the region and with the US stands to drop throughout 2020-21.
In addition, Mexico’s lower growth outlook, relative to its peers, suggests that the ongoing macro deterioration should continue, extending the risk of credit-rating downgrades and hampering the currency’s longer-term outlook.
The BRL’s recent underperformance continues to stand out and generate scepticism about Brazil’s outlook. To a large extent, the currency’s performance remains not well-understood and appears less to do with Brazil’s macro outlook than the fact that it continues to reflect the sweeping changes in local financial markets resulting from the transition to a new low-rate environment.
It’s unclear how long this transition will last but for the BRL to trade on a stronger footing, at a minimum, we should have stronger evidence that an activity recovery is firmly underway.
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