Mexico: Peso to move between politics and NAFTA - BBH

Analysts from Brown Brother Harriman, point out that the Mexican economy slowed down amid a prudent fiscal policy and monetary tightening. NAFTA and the presidential elections in July could weigh on the peso (MXN). 

Key Quotes: 

“The Mexican economy has slowed due to monetary and fiscal tightening. Its GDP has been below 2.0% y/y for three straight quarters. Monthly data in Q1 suggests that the economy has been stagnant mainly due to manufacturing.”

“Inflation has started to ease finally. February Mexico CPI slowed to 5.34% y/y, which is the lowest reading in one year, in spite of high oil prices. Previously implemented monetary tightening and appreciation of the Mexican peso has lowered inflation pressures, while medium- and long-term inflation expectations stay around 3.5%.”

“The Mexico central bank, Banxico, has continued to hike rates since December 2015. The policy rate reached 7.5% in February 2018, with a total increase of 450bp since December 2015.”

“The Mexican government has kept the fiscal policy prudent.”

“The political situation remains unclear. Andres Manuel Lopez Obrador (AMLO), who leads the left-wing party, Morena, is still leading with around 30% support. PAN leader Anaya is following AMLO with around 20% support. Former Finance Minister Meade, who is the PRI presidential nominee, has slipped to the third position with 16% support. The next government is likely to push fiscal stimulus as fiscal austerity has been unpopular under current Mexican President Peña Nieto. If AMLO is expected to win, markets would react negatively.”

“NAFTA renegotiations with the US have been delayed without significant progress on contentious issues, and could continue to weigh on the peso. The seventh negotiating round will be held in April in Washington, DC.”