Commentary: Go Mex Go

Markets and market sentiment can turn on a dime.  A week ago, the future of the Mexican Peso looked to be in serious doubt.  Some short-term traders were actually looking to get long MXN on a weak jobs report, in hopes that slow job growth meant more Fed stimulus.  Sounds great on a monetary front, but what about Mexican fundamentals?  A weak US economy can't be good for Mexico, which sells eighty percent of its exports to the United States. 

This shift in thinking about USD/MXN coincided with last month's fears of the Fed tapering off its asset purchase program.  Rates rose globally, and especially in Mexico.  Indeed, the yield on 10-year peso bonds surged 92 basis points in May to 5.30.  The Peso for its part also retreated from its 2-year high of 11.93 per dollar to near 12.9.  Foreigners, especially US names, have been shedding Peso denominated holdings in anticipation of rates rising stateside.  

In the end, the steady US jobs report, which slightly exceeded analyst expectations, was largely  MXN positve.  USD/MXN dipped to 12.65 on the news, while the greenback strengthened against EUR, GBP, and JPY.  For now, what's good for the US continues to be good for Mexico. 

Further analysis of the fundamentals also warrant cautious optimism.  While Q1 GDP growth slowed to a paltry 0.8 percent,  the main culprits were a manufacturing slump and sharp reduction in government spending, which shrank 2.9 percent yoy.  Facing mild headwinds stemming from weak export demand, and significant fiscal tightening, the fact that the economy was able to grow at all shows its significant resiliency.  Some analysts were predicting GDP to shrink in Q1. 

Mexico's central bank has also turned hawkish in the release accompanying its most recent monetary policy decision.  Inflation continues to creep up towards five percent, well above the bank's three percent target.  While the bank expects inflation to slow by July, it raised concerns about disruptions to the process of price formation, and broader inflation expectations.  The bank reaffirmed its resolve to monitor "all causes of inflation," and its intention "to maintain its ability to respond to inflationary pressures in order to meet its signaled inflation objective."  Crucially, no possibility of a rate cut was signaled despite weak growth.  

On technicals, the speculators have cut back their MXN longs by nearly 31,000 futures contracts, while shorts increased by 6,500 contracts.  This strengthening from a technical perspective is also welcome news.  For much of April, massive net longs, which exposed MXN to a rapid sell off, had spooked some actors from entering the market despite the strong fundamentals.   The 2013 high of 12.97 remains the crucial point of technical resistance for USD/MXN.  Thus far, we've seen two topside failures, and news wires are a buzz with stories of traders looking to sell ahead of this key level.   

Finally,  Mexican industrial production numbers are due for release tomorrow, and this data read will give the market more information as to the nature of Mexico's manufacturing slump.  The massive 4.94 yoy drop registered in March was potentially caused by Semana Santa celebrations falling in late in the month rather than in early April.  Strong numbers tomorrow would confirm this.  I remain cautiously optimistic, for now.