Mexico's aggressive fifty basis point cut last Friday caught the market off guard and sent the peso down nearly 900 points to 12.90. The Peso has slipped further 1500 points to levels around 13.05 against the greenback as of Tuesday afternoon. Putting this further slide in context, the dollar has performed well over the past several days rising substantially against other majors in the wake of Friday's positive jobs numbers. However, it also worth noting that in the hours between the release and Mexico's rate cut announcement, the Peso outperformed with USD/MXN sliding to 12.81. This signals that the market is still bullish the Peso in the sense that good data from the US is not causing investors to fret over potential tightening from the Fed. Rather, what's good for the US is probably still good for Mexico, and thus increases the attractiveness of Mexican assets.
While two day chart for USD/MXN looks very similar to USD/ZAR or USD/PLN, there's no denying that the Peso has substantially underperformed since Friday as compared to other Latin American currencies. Brazil's Real led the charge with USD/BRL down nearly about 2 percent since Friday. USD/COP and USD/PEN have risen a bit since Friday, but remain largely unchanged. USD/CLP has also tread water over the past two trading days.
The longterm outlook for the MXN has just become much less certain. Mexico is still an attractive place for foreign capital. The latest auction of short term government bonds was well attended, with 182 day Cetes achieving a bid to cover ratio of just under 4-1. The bid to cover on twenty year placement held on the same day was 4.2. It short, it still looks as though the market is still hungry for Peso denominated debt, a nice silver lining.
While central bank admonished the market that further rate cuts were not on the horizon, we've seen similar language before, specifically when Mexico started on the current easing cycle in early 2013. In general, despite a solid longterm story, the central bank seems unsatisfied while mediocre growth in the first quarter. (Though again, its important to keep in mind that Mexico's largest trading partner, the US, shrunk in Q1) Indeed, the Peso's fate is intimately tied to the US outlook and Mexico's ability to deliver strong growth. From the energy sector to education, there's a lot of progress which has been made. However, these moves have yet to result in better economic performance, and investors may lose patience.
Realistically, these reforms will take years if not decades to boost growth, which the possible exception of the dismantling of the Pemex monopoly which may allow for new investments as soon as 2016. The short term growth outlook will depend heavily of the central government's ability to bring new spending projects online. The fiscal authorities have fully reversed their premature tightening that began with the new presidential administration in 2013. However, disbursing funds for new projects has been slow, resulting in lower than projected deficits and thus less stimulus that had been planned. This red tape has undoubtedly hampered growth.
Technically, the short-term outlook probably hinges on the Peso ability to remain above its 2013 lows against the dollar. A quiet week with little movement would do wonders for the Peso. Ideally, it would settle into a new range, maybe around 13.00 to 13.1, making it attractive to carry traders.
In sum, the Banco de México has certainly gotten what it wanted. It has shaken up the markets and grabbed investor attention. Let's hope this dynamism reaches the real economy.
