One of the safest plays
Mexico (EWW) is current one of the safest plays in emerging markets, naturally hedged given its close relationship with the United States.
A few months ago, Mexico was a clear strong prospect for investing given its strengthening currency and modest growth with low inflation. However, earlier this month, Banxico (Mexico’s central bank) cut the policy rate down to 3.75%, which stopped the strong revaluation path of the currency. What now?
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Inflation remains low
Since inflation has remained low and growth started to look slower than expected, it made sense for the government to tighten. The move was unexpected though, because most economists agreed that the strengthening Mexican peso was necessary to stop the depreciation slide in emerging market currencies sparked by tapering fears.
FX on a postive trend
The fact that the government lowered rates may not reverse the currency trend. It may only raise the potential support level. While before, a level close to 12 pesos per US dollar could have been feasible, now a more realistic support point is probably in the 12.50-to-12.75 range. That’s still stronger than the current levels above 13 pesos per dollar.
Further rate cuts unlikely
The cut also seems to be a one-time deal, though if production data continues to disappoint, Banxico could lower rates a bit more. Given the slack in inflation and modest growth, this could be possible, but the compromise would be weakening the peso. The upcoming PMI data will be an important datapoint to wait for.