Mexican Peso remain under pressure – Deutsche Bank

Analysts at Deutsche Bank have given their views on the prospects for the Mexican currency.

Key Quotes

“We continue to believe that the MXN’s positive price action is for the most part driven by technicals and a relatively illiquid environment for the peso. The peso depreciation is larger than one would have expected in light of the change in positions of same magnitude over the past two years. Given that the aggregate net short position in futures is still relatively sizeable, a further appreciation of the MXN on technical grounds cannot be discarded”.

“Yet from a fundamental point of view, nothing relevant to the future of the peso or Mexico’s economy has changed”.

“There are two ways of looking that the MXN’s value from a fundamental stance. First, one can focus on flows and risk and argue that because of US policies, the decline in oil production, and the composition of Mexico’s growth all of which result in a still excessive current account deficit do point the way towards a weaker MXN. Yet in the longer run a weaker MXN will not fix the current account imbalance nor trigger a shift in the composition of growth in Mexico. From that point of view, it is not the MXN that is away from its equilibrium but rather the economy’s excessive exposure to oil and its excessively dynamic consumption that are away from its equilibrium. Regardless of the view one takes, an MXN rally is only likely to go beyond a short-term retracement when the data shows a significant slowing of domestic demand either due to uncertainty or because of signals from policymakers. Only then will rallies potentially anchor the USD/ MXN below 20”.