Mexico’s peso runs on auto mode
City Index July 21, 2014 11:55 PM
<p>How far can the Mexican currency appreciate as traders await Mexico’s energy law to be enacted? Earlier this month, Mexico’s Senate approved the first of […]</p>
How far can the Mexican currency appreciate as traders await Mexico’s energy law to be enacted? Earlier this month, Mexico’s Senate approved the first of four energy bylaws for contracts to enable private companies to explore oil and gas. These policies had been a key element in boosting the Mexican peso in the first half of the year.
From oil to autos
Yet, there may be more promising currents for the peso other than the energy sector. Mexico’s automobile production in the first half of 2014, reached 1.6mln, narrowly exceeding Brazil’s. Analysts expect Mexico to secure its position as the new leader in Latin American car production throughout 2014. Soaring car export sales to North America are expected to make Mexico as the biggest source of US car imports by end of 2015.Daimler and Nissan have announced a €1bln factory in Mexico and so has BMW. With 80% of locally produced cars destined for abroad, Mexico’s auto exports are also set to overtake those in Brazil.
Mexico’s unemployment dropped over the last two months, reaching 4.8% in July, while manufacturing production rose 3.6% in the year ending in May. Q1 GDP rose 1.8% y/y, breaking out of last year’s 0.7%-1.6% range. 2014 GDP growth is estimated at 2.3% to 3.3%.
Peso to gain on Banxico’s pause
Earlier this month, Mexico’s central bank, Banxico, held the reference overnight rate at a record low of 3%. The last rate cut was a surprise 50-basis-point reduction in June, following a 25-basis point cut in October 2013 and a 50-basis point cut seven months prior, when the easing campaign got underway. Friday’s release of the minutes from this month’s monetary policy meeting will clarify the extent to which the doves continue to assert their bias over future policy. The decision to hold rates unchanged emerged after inflation rose 3.8% y/y in June, testing Banxico’s 3% target. Markets expect the central bank to shift towards “pause” mode, until rates are probably raised in H2 2015.
The Mexican peso lagged its Brazilian and Colombian counterparts so far this year, but continues to gain ground versus the USD, rising about 5% over the last six months. Banxico will closely monitor US growth and import demand once the Fed’s monthly asset purchases are concluded in autumn, which will help determine the central bank’s consolidation into neutral policy. For USDMXN, we anticipate additional (but gradual) retreat towards an initial target of 12.60. Any additional USD selling is likely to encounter stabilisation near the 100-WMA of 12.30. More interestingly, we expect EURMXN to extend this year’s decline towards 16.60 as the ECB’s insistence to ease contrasts with Banxico’s policy normalisation.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.