Recent Developments Are MXN-Positive

(from my colleague Dr. Win Thin)

INTRODUCTION

Banco de Mexico announced a new FX program to help support the peso without draining its foreign reserves. While this should help lower FX volatility near-term, the peso is benefiting more from a more benign EM backdrop and signs of thawing US-Mexico relations.  

POLITICAL OUTLOOK

Tensions remain high as President Pena Nieto and his government has said they refuse to accept unilateral US actions on immigration.  

Mexican Foreign Minister Videgaray said the government will fight President Trump’s most recent immigration order, which allows the US to deport any illegal immigrants to Mexico, even if they are not Mexican nationals. 

Secretary of State Tillerson and Secretary of Homeland Security Kelly are currently in Mexico. The team is meeting with their Mexican counterparts to discuss immigration and security issues. The meetings come after Pena Nieto last month cancelled a visit to the US, and so perhaps there is a thaw in relations. White House press secretary Spicer played down the rifts, instead calling US-Mexico relations as “phenomenal.”

Indeed, comments today from US Treasury Secretary Mnuchin regarding Mexico should be viewed as constructive. This stance would support the view that a less confrontational stance will be seen, despite President Trump’s inflammatory campaign promises. Mnuchin said that he was not worried about US-Mexico trade relations, calling it a “win-win” result for both countries. He added that we shouldn’t expect action on US-Mexico trade in the short-term.  

ECONOMIC OUTLOOK

The economy is still sluggish. GDP growth is forecast to decelerate modestly to 1.6% in 2017 from 2.3%% in 2016. GDP rose 2.4% y/y in Q4 vs. 2.1% in Q3, so there are upside risks to the forecasts. Indeed, higher oil prices should help boost growth in 2017. On the other hand, fiscal and monetary tightening will act as headwinds.