Sep 11 / Alef Dias

Macroeconomics Weekly Report - 2023 09 11

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"The economy has benefited from increased employment, rising wages, high remittances and positive consumer confidence. Investment is benefiting as Mexico attracts more capital inflows: the country has been one of the biggest beneficiaries of the relocation of global supply chains, given its proximity to the US"

Mexican Peso continues with strong fundamentals

  • After 8 months of strong performance, the Mexican Peso has been depreciating in September, with seven consecutive drops until last Friday (September 8th).
  • The recent movements of the Mexican currency lack internal justification, given the solid economic growth and the slowdown in inflation. The devaluation seems to be more influenced by the appreciation of the dollar on the global stage, and the Chinese economic slowdown led to a greater impact on Latin American currencies in September.
  • The combination of a strengthening economy and an extremely positive interest rate differential against the US makes a reversal of the current scenario of devaluation of the Mexican Peso in the coming weeks very likely.

Introduction

After 8 months of extremely positive performance, the Mexican Peso has been depreciating against the dollar in September. Up until last Friday (08/09), the Mexican currency had fallen seven consecutive times, with a depreciation of 5.07% in the period.

Nevertheless, the currency has accumulated an appreciation of 9.74% in 2023, making it one of the best performing emerging currencies of the year. This appreciation has been anchored in solid macroeconomic fundamentals, but the currency's recent movements have led analysts and traders to question whether anything relevant has changed in the Mexican economy.

Given this context, this report aims to discuss the reasons behind the recent devaluation of the Peso and update the fundamentals of the Mexican economy.

Image 1: MXN and Latin American currencies index

Source: Refinitiv

Image 2: Mexican GDP (YoY, %)

Source:Bloomberg

Suffering with its peers

Looking at the domestic fundamentals, it's hard to find any justification for the Mexican currency's recent movements. The most recent GDP data showed that the Mexican economy continued to grow rapidly in the second quarter, while inflation continues to slow down - as the August data showed.

This means that the recent devaluation of the Mexican Peso is much more closely linked to the external context of the dollar's appreciation, especially against Latin American currencies - which tend to suffer more from China's economic slowdown.

Fundamentals point to a reversal of the trend

The performance of the Mexican economy in 2023 is admirable, especially considering the global scenario of high interest rates and economic slowdown. Domestic demand remains robust, even in the face of restrictive fiscal and monetary conditions, as well as negative sentiment towards some government policies.

Image 3: Mexican Inflation (YoY)

Source:

The economy has benefited from increased employment, rising wages, high remittances and positive consumer confidence. Investment is benefiting as Mexico attracts more capital inflows: the country has been one of the biggest beneficiaries of the relocation of global supply chains, given its proximity to the US. In July, for the first time in over 20 years, Mexico overtook China as the main exporter to the US.

Another point that favors the Mexican economy's macroeconomic scenario is the "homogeneity" of its growth. Both manufacturing and services have shown robust growth, which makes economic performance less dependent on specific sectors.

As Mexican economic data is coming in above the Mexican central bank's forecasts, signaling growth above potential, the likelihood of interest rate cuts this year is reduced. Consequently, the interest rate differential is likely to remain high, favoring the Mexican peso.

In Summary

As is common for emerging currencies, their movements are often the result of external rather than internal factors, given that the external sector is usually very important for these economies.

The Mexican Peso has suffered from this "evil" in September, with a devaluation very similar to that of its Latin peers. However, the Mexican economy has an almost unique combination in a context of global economic slowdown: the country has shown resilient growth amid high interest rates and slowing inflation.

The combination of a strengthening economy and an extremely positive interest rate differential against the US makes a reversal of the current scenario of devaluation of the Mexican Peso in the coming weeks very likely. The main risk for this scenario is a rise in risk aversion in the foreign exchange markets, which could impact Latin American currencies as a whole.

Image 5: MXN and Latin American currencies index

Source: Refinitiv

Image 6: Industrial Production - Mexico (YoY, %)

Source:Bloomberg

Weekly Report — Macro

Written by Alef Dias
[email protected]
Reviewed by Victor Arduin
[email protected]
www.hedgepointglobal.com

Disclaimer

This document has been prepared by hEDGEpoint Global Markets LLC and its affiliates ("HPGM") exclusively for informational and instructional purposes, without the purpose of creating obligations or commitments with third parties, and is not intended to promote an offer, or solicitation of an offer, to sell or buy any securities or investment products. HPGM and its associates expressly disclaim any use of the information contained herein that may result in direct or indirect damage of any kind. If you have any questions that are not resolved in the first instance of contact with the client ([email protected]), please contact our internal ombudsman channel ([email protected]) or 0800-878-8408 (for clients in Brazil only).

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