USD/MXN - Casa de Bolsa Banorte Ixe

Fixed-Income and FX Strategy
Mexico
USD/MXN: The long and winding road to
peso appreciation
October 15, 2014
www.banorte.com
www.ixe.com.mx
@analisis_fundam

We adjust upward our year-end USD/MXN forecasts to 13.30 and
12.90 for 2014 and 2015, respectively, from 12.60 and 12.50 previously

A more complicated external scenario could result in higher volatility
going forward as the Fed begins unwinding its stimulus measures

Mexico’s GDP should pick up in 2015, although temporary external
account deterioration could limit the support for the currency and the
possibility of further rating upgrades in the short term
Alejandro Padilla

Valuation based on the long-term real exchange rate show a moderate
undervaluation of the MXN, albeit not significantly stretched
FX Strategist
[email protected]

Technical positioning and hedging costs using MXN shorts have
improved and could induce a mild reversal of recent peso weakness

These suggest fewer opportunities for directional positions, favoring
range trading. Attractive alternatives include option strategies, peso
longs against more vulnerable EMs or the use of other funding vehicles
Gabriel Casillas
Chief Economist and Head of Research
[email protected]
Head Strategist - Fixed-Income and FX
[email protected]
Juan Carlos Alderete, CFA
Two opposing forces shape a new trajectory. We adjust our USD/MXN
forecast for YE14 to 13.30, from 12.60, and expect a gain of 3.1% by year-end
2015 to end at 12.90 pesos per dollar (previous: 12.50). Our revision is driven
by two main factors: (1) Renewed increase in volatility due to uncertainty about
global growth, Fed monetary policy and geopolitical risks; and (2) the absence
of upgrades by at least one more rating agency to the “A” universe before yearend that we expected, which could have unleashed strong inflows as two
agencies would have placed Mexico in this category.
In our view, two opposing forces will drive the currency next year: (1)
Uncertainties about the pace and timing of likely rate hikes by the Fed that
could result in higher volatility and a deceleration of portfolio inflows, coupled
with higher peso vulnerability given recent rate cuts by Banxico that have
compressed the carry; and (2) more favorable prospects for Mexico’s growth
and FDI in 2015 due to the implementation of structural reforms.
USD/MXN forecasts
Pesos per dollar
13.6
13.5
13.4
13.3
13.2
13.1
13.0
12.9
12.86
12.8
12.7
Mar-14
Jun-14
13.43
13.40
13.30
13.10
13.05
12.90
Forecast
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Source:Banorte-Ixe
1
Dec-15
Document for distribution among the
general public
We begin by reviewing external factors that in our view could have the greatest
influence in the currency, followed by our perspectives and the most relevant
aspects in the local front that also drive our new forecasts.
Shift in Fed expectations impacts currency markets. As the Fed announces the
end of new asset purchases in October, the FOMC has been preparing the
market for a policy shift as inflation and employment in the US come closer to
their mandate. In its latest meeting back on September 17, the Fed left its
communiqué mostly unchanged but adopted a more hawkish stance as
members’ median Fed Funds rate projections from next year and into 2017
shifted higher. More importantly, the spread to rate expectations derived from
market prices widened as a result, given that the latter still implies a more
gradual and slower path of increases (see chart below on the left). Among other
factors, these innovations have increased volatility (particularly since
September) and provided a broad lift to the USD. The DXY index appreciated
7.7% in 3Q14 and gathered a more rapid pace last month, hovering near postcrisis highs. In the same quarter, EM currencies accelerated downward with a
loss of 6.5% (from a gain of 0.5% in 1H14) and G-10 depreciated 7.4% (from
+1.1%) according to our equally weighted indices. The Mexican peso lost 3.4%
ending at 13.42 per dollar, and accumulates a YTD loss of 3% (see chart below
on the right).
Fed “dot-plot” and market Fed Funds forecast rate
EMFX performance against the USD
%
Fed funds futures - Jun
Fed funds futures - Sep
Median Fed forecast -Jun
Median Fed forecast - Sep
5.0
4.0
1.0
3.75
2.50
1.38
1.13
0.0
2015
2016
2017
3Q14
MYR
BRL
MXN
PEN
ZAR
COP
PLN
HUF
CLP
RUB -19.6
2.88
3.0
2.0
3.75
% as of October 14, 2014
-22
Long Term
Source: Federal Reserve, Bloomberg, Banorte-Ixe
0.3
-1.6
-3.0
-3.6
-5.1
-5.8
-9.0
-10.6
-10.6
-17
-12
Source: Bloomberg, Banorte-Ixe
Past hiking cycles show mixed FX performance. Our base case assumption
pencils in the first rate hike in June 2015, as per our economists’ forecast,
driving the Fed Funds rate from 0% to 1.25% by year-end. In this context, we
analyzed EM currencies during the past two hiking cycles: (1) Jun-99 to May00, with an accumulated hike of 175bps and the Fed Funds rate going from
4.75% to 6.5%; and (2) Jun-04 to Jun-06, with +425bps from 1.25% to 5.25%.
In our view, both share similarities with the current situation. In the former,
inflation was muted (core PCE around 1.3%; headline at 2.1%yoy in May-04),
growth robust (GDP at 4.8%yoy in 1Q04), and unemployment relatively low
and trending down (at 4.3% in 1Q04), with growing concerns over financial
stability and valuations in the run-up of stock prices due to the “dot-com”
bubble. In the latter, both inflation and growth were high (core PCE: 1.9%;
headline: 3.1%, GDP growth: 4.4%; unemployment: 5.6%, at equivalent time
frames), with the Fed committing to move in a gradual fashion and signaling
that it would increase rates by 25bps per meeting, which the market began
2
YTD
-7
-2
3
anticipating beforehand. The table below on the right shows FX performance for
EM and the peso before and after the first rate hike. Although these results
should be taken with caution due to the limited sample and wide divergences in
some cases (along the influence of a wider range of other factors), it is worth
noting that: (1) The dollar tended to gain in the twelve-month period before the
event, with an accumulated average increase of 7.3% and 2.2% against the peso
and our EM index, respectively; and (2) after the event, the dollar fell modestly
in the six- to nine-month period after the first hike.
EMFX index performance during Fed hiking cycles*
USD during the past two hiking cycles by the Fed
Index 100= 12-Dec-93
250
%, index 100= Day of the first rate hike*
230
210
190
170
150
130
110
90
1994-1995:
+300bps in
7 meetings
1999-2000:
+150bps in
6 meetings
2004-2006:
+425bps in
17 meetings
70
Jul-93 Jan-96 Jul-98 Jan-01 Jul-03 Jan-06 Jul-08 Jan-11 Jul-13
* In percent, increase means dollar appreciation.
** Simple average of Latam (BRL, CLP, COP, PEN), Europe, (RUB, PLN, TRY, HUF), Asia
(MYR, INR, IDR, MYR, KRW) and Africa (ZAR)
Source: Bloomberg, Banorte-Ixe
USD/MXN
-12 months
-9 months
-6 months
-3 months
+3 months
+6 months
+9 months
+12 months
1999-2000
5.0
-6.8
-11.7
-1.2
-0.7
0.1
-0.9
1.7
2004-2006
9.6
2.2
5.9
2.1
-0.6
-2.7
-4.1
-5.2
Average
7.3
-2.3
-2.9
0.5
-0.7
-1.3
-2.5
-1.8
USD/EM**
-12 months
-9 months
-6 months
-3 months
+3 months
+6 months
+9 months
+12 months
7.2
8.5
4.6
-0.9
4.6
4.1
4.8
9.1
-2.8
-0.9
1.9
2.4
-2.0
-7.2
-8.6
-6.5
2.2
3.8
3.3
0.8
1.3
-1.6
-1.9
1.3
* In percent, increase means dollar appreciation.
** Simple average of Latam (BRL, CLP, COP, PEN), Europe, (RUB, PLN, TRY, HUF), Asia
(MYR, INR, IDR, MYR, KRW) and Africa (ZAR)
Source: Bloomberg, Banorte-Ixe
Watch for risk of higher volatility as the Fed unwinds unconventional
measures. Although evidence from past hiking cycles gives us some guidance
about potential performance, it is at best mixed. Furthermore, the long period of
ultra-low rates and the use of unconventional measures (several central banks
embracing QE) suggest the possibility of further stress down the road, as
recently warned by the G-20, BIS and IMF. In this respect, it is worth assessing
FX performance during the “taper tantrum” in May 2013. As markets were
initially surprised, volatility picked up strongly and EM currencies weakened
amid higher rates, with losses in most markets except the S&P500 (see table
below on the left).
Although we are more confident that past lessons were learned, the
unprecedented nature of the unwinding process could bring further losses as
investors adjust to new circumstances. In particular, we view the combination of
hikes and volatility as a particularly adverse combination for the peso given its
widespread use as an efficient hedging vehicle (more details in the following
paragraph). As shown in the table (below on the right), changes in both the 10year TIIE-swap to Mbono spread and MXN futures positioning signaled high
hedging demand during this episode (particularly the latter), which in our view
was greatly responsible for the strong depreciation in this period. All in all, it is
our take that one of the most significant drivers for next year’s performance will
be the Fed’s degree of success in managing expectations by moving gradually
and its ability to adapt to circumstances in a market-friendly way in order to
keep a lid in volatility, of which we are relatively optimistic about.
3
“Taper tantrum” market statistics
Rate spread and USD/MXN futures before the Fed’s tapering
Change from May-1 to Sep-17-13 (one day before Fed delayed tapering)
Variable
Change
Comment
USD/MXN
USD/EM Index
FX Volatility*
USD/MXN 1M implied vol
USD/MXN 3M implied vol
S&P 500
VIX Index
10-year UST
USDMXN futures (% of open
int.)
USDMXN futures (US$ bn)
10Y TIIE Swap- Mbono Spread
5.92%
6.20%
+45 bps
+370 bps
+307 bps
6.70%
+86 bps
+117 bps
12.92 to 13.20 per dollar
+90.2 pp
+6.1.
-9.2 bps
Sharp reversal from net short to long
Sharp increase in USD net longs
Initially from 68 to 82bps on June 25
Bps and % of open interest, respectively
Spread TIIE - 10Y Mbono (LHS)
90
Futures Position (RHS)*
80
60
40
20
70
8.7 to 9.1, up to 11.8 by mid-June
8.7 to 12.6, max June 20 at 17.7
9.4 to 12.5, max June 20 at 15.9
0
60
-20
50
13.5 to 14.4, up to 20 by mid-June
1.67% to 2.85%
40
30
20
Jan-13
* JPM Global FX Implied volatility Index
Source: Bloomberg, Banorte-Ixe
-40
Fed
surprises
with no
Tapering begins
tapering
Bernanke
warns of 10Y UST
tapering to reaches
Congress
3%
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
* USD/MXN net long contracts (+) as a percent of open interest
Source:Valmer, CME, Bloomberg, Banorte-Ixe
MXN vulnerable in case of a disorderly adjustment. Local authorities such as
Banxico as part of the Financial Stability Council have stressed that the reading
of the policy path in the US has become more complicated and its normalization
could pose risks to the financial system, lift volatility and impact EMs. On the
other hand, since March 2013, Banxico has cut the reference rate by 150bps
(overnight rate from 4.5% to 3.0%) in a bid to spur growth amid contained
inflation and anchored expectations. From this point of view, Mexico’s policy
has also diverged from the Fed as the short-term interest rate differential has
compressed, making the peso more vulnerable to episodes of risk aversion and
volatility. Following the declining trend in vols during 1H14 that induced carry
trades, the recent bout has impacted the levels of adjusted carry and currently
stands at the lower-end of the range when compared to other countries.
Moreover, costs for peso shorts in case of higher hedging demand have
decreased as suggested by the reduction in forward points and low USD/MXN
risk reversals.
If US rate hikes outpace Mexico’s, both factors could result in a more attractive
and efficient use of the peso as a hedge, particularly if Banxico lags the Fed in
the process. Nevertheless, market pricing implies investors have already
discounted for a scenario of greater hikes in Mexico than in the US, which has
recently moderated its attractiveness for longer term hedges and suggests a low
probability that this situation materializes. Moreover and given that S&P and
Fitch have recently discarded a rating or outlook upgrade in the short term, the
lack of catalysts could dampen the peso’s defensiveness clearer back in August,
when the energy reform was finally approved and turned into law. In spite of
this, credit rating agencies have stressed that the reforms are clearly positive in
the mid- to long-term as they should increase oil production and improve
Mexico’s fiscal position in coming years apart from having a positive impact on
growth as soon as 2015.
4
Jul-14
-60
-80
-100
USD/MXN forward points
Pips
1,200
Rate spread and Sharpe ratios of EM with respect to the US
3M (LHS)
5,000
1Y (RHS)
1,100
4,500
1,000
4,000
900
3,500
800
700
Jan-13
Banxico's
50bps cut
25bps
cut
Jul-13
3,000
50bps
cut
25bps
cut
Jan-14
2,500
Bps as of October 10, 2014
Sharpe*
TRY
RUB
BRL
ZAR
COP
MXN
CLP
KRW
PLN
HUF
Jul-14
Change in 3M Spread since 2013
87
332
71
235
60
403
5898
47
-101
35
-117
33
-193
27
-60
22
-204
13
-398
-600
-400
-200
0
200
400
600
* 3M interest rate differential between with respect to the US divided by 3M implied volatility
Source: Banxico, Bloomberg, Banorte-Ixe
Source: Bloomberg
…particularly given high portfolio inflows from foreigners... According to
Banxico and the IIF, accumulated portfolio inflows by non-residents into
Mexican equity and debt securities from 2010 until August this year totaled
MXN 1.7 trillion (US$ 147.1 billion), equivalent to 14.3% of nominal 2009
GDP and the second highest among several of the most important EMs
excluding China, just after Brazil (see both charts below). We estimate foreign
investors’ share in both markets at 36.2% as of August, with a slight reduction
in the last two months from its historical high of 37%.
High global liquidity, solid macro fundamentals and favorable prospects driven
by the approval of reforms have made our country one of the top recipients
among EM. So far and apart from the “taper tantrum”, evidence of significant
outflows is scant. The latest EM Portfolio Flows Tracker shows that after a
steep deceleration in August, our country’s bonds were among the most favored
last month (along Brazil and India), with South Africa, Turkey and Indonesia at
the bottom. Nevertheless, elevated holdings pose greater risks for the peso as
portfolio inflows should moderate and could lead to outflows in case of higher
global rates and the paring back of liquidity, particularly in case of a disorderly
adjustment in the Fed’s normalization.
Portfolio inflows into Mexican debt and equity
Net portfolio inflows to selected EM
US$ million, quarterly
Govt. Bonds
17,000
Stocks
US$ billion, accumulated
Mexico
200
Total
Korea
150
12,000
7,000
QE1
QE2
Brazil
Thailand
India
Turkey
QE3
100
2,000
50
-3,000
Tapering
begins
-8,000
0
Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14
*3Q14 until August
Source: Banxico
Source: IIF
5
…and because of geopolitical risks. An additional factor to consider is renewed
flare-ups in geopolitical tensions in places such as Ukraine, Russia, Syria, Iraq,
and Israel, among others. Although difficult to forecast and rapidly changing,
these will most likely remain relevant going into 2015. In this respect, it is
worth mentioning that even after considering lower costs of MXN shorts due to
Banxico’s rate cuts, the peso tends to be a reliable hedge to other risky assets as
suggested by its high and negative correlation with some indexes in this
universe, providing diversification benefits. The chart below shows the 30-day
correlation to some of the most relevant global indexes of risky exposures
during periods of risk aversion (highlighted in grey and as measured by VIX
above 15.2, its average since 2012). Apart from the UST around the “taper
tantrum” period, this correlation tends to turn more negative during these
periods.
USD/MXN 1M correlation with other assets*
Based on daily percentage changes
1.0
MSCI World
SPX
10Y UST
0.8
0.6
0.4
0.2
0.0
-0.2
-0.4
-0.6
-0.8
-1.0
Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14
*Source: Bloomberg, Banorte-Ixe
More accommodation by other central banks and a high local currency risk
premium could help counter for higher rates. As mentioned above, it is our
take that markets could be more volatile next year. One factor that could help
counter for this is the possibility of more accommodative policy by other central
banks. The ECB has recently announced new TLTROs and an ABS and covered
bond purchase programs targeting an increase in its balance sheet of EUR 1bn
and could even add sovereign purchases (full QE) if conditions worsen or ABS
availability does not allow them to achieve their goal. The BoJ could increase its
current program if the economy and inflation fail to pick up after the tax hikes.
Both actions could help global liquidity to stay ample. Although it could be of
some help, we prefer to be cautious that these could have a very strong and
direct effect on the peso against the dollar as past episodes of stimulus by these
central banks suggest a relatively muted impact.
Apart from these, valuations and fundamentals should always be taken into
account. After the most recent adjustment, we think that Mexico looks attractive
on several metrics such as the local currency risk premium, which aims to
measure the added benefit of exposure in the local market hedging credit risk
but keeping FX exposure (along some counterparty risk). As shown in the
graphs below, Mexico’s risk premium stands at 275bps, with some impact after
Moody’s upgrade but still above countries such as Colombia (despite our higher
credit rating), Thailand and Malaysia.
6
USD/MXN – Local currency risk premium
Local currency risk premium in selected countries
%
%
3.9
5.3
3.7
4.3
3.5
COP (BBB)
MYR (A-)
3.1
MXN (BBB+)
PLN (A-)
Moody's upgrade
3.3
3.3
2.3
2.9
1.3
2.7
0.3
2.5
2.3
Jan-13
ZAR (BBB-)
THB (BBB+)
Jul-13
Jan-14
-0.7
Jan-13
Jul-14
* Defined as the local currency 5Y swap rate less 5Y CDS spread and 5Y UST rate
Source: Bloomberg, Banorte-Ixe
Jul-13
Source: Bloomberg, Banorte-Ixe
In the following section we will state our expectations for Mexico and its
potential impact on the currency, including the peso’s valuation and technical
factors underlying the market.
Bullish on Mexican growth after (another) weak year. In our view, one of the
most pervasive local drivers behind our currency’s failure to strengthen has been
the slowdown of Mexico’s GDP, which has had consequences for further rating
upgrades, the government’s fiscal stance and general debt levels, slack in
resource utilization and interest rate differential with the US, among others.
YE14 forecasts at the beginning of this year according to Banxico’s survey
stood at 3.4%yoy, which has successively been cut to just 2.5% by the latest
survey released on October 3. For 2015, market expectations are more
favorable, picking to 3.8%. Our own estimates are for growth rates of 2.7% and
4.5-5.0% for 2014 and 2015, respectively. In this respect, our view of a mild
peso gain next year is mainly explained by our above-consensus forecast in the
latter. In particular and should it materialize, growth should serve as an
opposing force against more stringent external conditions. Higher growth in the
US (at 3.2%yoy vs 2.2% in 2014), acceleration in domestic demand (expecting
inflation at 3% by year-end and below consensus of 3.5%, which should provide
a lift to consumer confidence), GFI and an unchanged (total) fiscal deficit
should all help Mexico’s GDP next year.
Credit rating upgrades more likely a 2016 story. In our view, Fitch and S&P
did not follow Moody’s upgrade to the “A” level mainly due to two factors: (1)
The government’s recognition that crude oil production was lower than
originally reported, due to water-calibration problems (see chart below on the
left); and (2) even though the government is doing an important effort to reduce
the deficit, Financial Requirements of the Public Sector will remain high in
2015 (see chart below on the right). In this context, Fitch stated in its September
22 communiqué that “the passage of the energy reform is unlikely to have a
near term impact on the sovereign rating of Mexico” and that future rating
actions will focus “on actual economic and fiscal performance as well as
Mexico’s ability to mitigate credit weaknesses such as moderate growth rates
and limited fiscal flexibility underpinned by a narrow revenue base, high
reliance on oil revenue and limited fiscal buffers”. Likewise, S&P on August 14
7
Jan-14
Jul-14
stated that “the stable outlook balances the challenges of effectively
implementing the numerous reforms passed in 2013 against the benefits that are
likely to appear only in the next two to five years”; moreover, the passage of
secondary bylaws related to the energy reform did not affect the rating as “we
already took into account the effect of these reforms when the sovereign passed
them in December and we upgraded our foreign currency rating on México to
BBB+”
Although, we don`t discard a change in Mexico’s outlook by any of the main
agencies next year (currently “Stable” in all three cases) or even an upgrade, this
is not our base case scenario. In this setting, the temporary deterioration in fiscal
accounts should prevent a rating change in the near future. Nevertheless, if it
actually happens, Mexico’s risk premium could decrease in a significant degree
(as suggested by CDS and local currency risk premia relative to countries in the
“A” universe) and lead to a surge of portfolio inflows, representing a relevant
downside risk to the forecasts presented here.
Mexico’s crude oil production
Financial Requirements of the Public Sector*
2,600
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Thousand barrels, daily
As percent of GDP
2,550
2,500
2,467
2,450
2,400
2,350
2,300
Adjustment for
watercalibration
problems
2,311
2,250
Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14
4.2
3.4
2.6
3.2
2.7
4.0
Forecast
3.5
3.0
3.0
1.6
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: Pemex
* Positive means net deficit, expected for 2015 according to budget proposal
Source: Ministry of Finance
Temporary current account and broad basic BoP deterioration. Our
economists forecast that the CA deficit will widen from 1.8% this year to 2.5%
of GDP in 2015. On one hand, we see a temporary deterioration in the trade
balance, going from a US$3.9 to 9.5bn deficit. Total manufacturing exports
should provide the heavy lifting due to better growth in the US (especially in
industrial activity, which correlates strongly with the Mexican economy), while
oil production will continue declining. On the other hand, the most noteworthy
feature is our expectation of a sizable increase in capital goods’ imports
(11.3%yoy) as GFI gathers pace because of investments related to the structural
reforms -particularly in the energy industry- and greater dynamism in domestic
demand, with production and exports from these investments lagging behind.
Going into the services account, the most relevant driver that should help to
somewhat outweigh for higher imports should be stronger remittances, going
from US$ 23.5bn this year, to about US$ 25bn (+6%) as the US economy
strengthens and unemployment among Mexican workers without citizenship
(which tend to send more money than those with citizenship) continues trending
downwards.
8
Passing on to the capital account, we expect an acceleration of FDI as foreign
companies establish operations in Mexico to exploit new changes in energy,
advancing from about US$ 21.7 to 30 billion on a yearly basis (+37.6%), with
inflows related to this industry at around US$ 5 billion. In our view, these are
particularly important in the medium-term as an alternative source of financing
for the CA deficit given that it is highly likely that portfolio inflows decelerate
as global financial conditions tighten. In this respect, we pencil in a 10% fall in
this category, closing the year at US$ 45 billion. All in all, we forecast the broad
basic balance of payments (CA deficit + net FDI + net portfolio flows) to stand
at US$ 33 billion, still ample and healthy enough for the country’s requirements
and stability but less supportive for the peso at the margin.
Main Balance of Payments concepts
US$ bilion
30
Current Account
FDI (net)
Broad Balance of Payments* and USD/MXN
US$ billion (last 4Q sum) and pesos per dollar, respectively
90
BBoP (LHS)
USD/MXN (RHS, inverted)
Portfolio flows (net)
20
70
10
50
0
30
-10
10
-20
12.0
12.5
13.0
13.5
14.0
-10
Forecast
-30
-30
1Q09
1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15
14.5
15.0
1Q10
1Q11
1Q12
* Current Account + Net FDI + Net portfolio flows
Source: Banxico, Banorte-Ixe
Source: Banxico, Banorte-Ixe
Valuation not stretched and more muted inflation next year. Earlier this year
inflation surged to a peak of 4.5%yoy in January (core: 3.2%) mainly due to the
effects of the fiscal reform. By mid-September, inflation stood at 4.2% (core:
3.3%), most recently on an upward trend on the back of increases in agro prices
and adverse seasonality patterns. Although expectations remain well anchored,
we believe that cumulative price increases have exerted a negative effect when
seen through our real exchange rate indices. Based on pre-crisis levels and up to
last month’s end, the MXN accumulates a 6.5% real depreciation against the
USD (18.9% in nominal terms) but only 1.1% weaker (and 0.5% on a tradeweighted basis), when compared to its 10-year average. Moreover, this figure is
less than the 10.4% fall in our index of main competitors in the US imports
excluding China (TWD, KRW, CAD and JPY). On the other hand, our shortterm financial model -that uses a series of variables with which the currency has
shown strong correlations in the past- signals that the peso is currently about 2%
undervalued, in contrast with other episodes of high misalignment such as
December 2011 or April 2013, and from which the peso reverted strongly
subsequently.
All in all, we believe that the peso’s valuation doesn’t signal any significant
misalignment or strong advantage to other relevant EMs or market conditions,
dampening somewhat the potential for broader and significant support from this
front. Nevertheless, we are more positive that changes to gasoline pricing
policies, a favorable base effect and still ample slack, among others, will be
sufficient for prices to trend downwards most of 2015 and could reach below
2.5% by 3Q14, ending the year at Banxico’s target of 3% and lower than market
9
11.5
1Q13
1Q14
1Q15
expectations around 3.5%. In this sense, if low inflation is coupled with higher
growth next year, the peso could strengthen as investors reward a potentially
attractive combination of returns and stability, albeit only modestly.
USD/MXN real exchange rate against competitors in US market*
USD/MXN valuation according to short term financial model
Index 100= Dec-31-07
135
MXN
Competitors Index**
Pesos per dollar
Index excl. China
Actual
13.40
Model
13.20
125
13.00
115
12.80
12.60
105
12.40
95
12.20
85
Dec-07 Oct-08 Aug-09 Jun-10 Apr-11 Feb-12 Dec-12 Oct-13 Aug-14
12.00
Jan-13
*Increase means real depreciation against the USD.
** Includes CAD, JPY, TWD, KRW and CNY, weighted by its market share in US imports market
Source: Bloomberg, Banorte-Ixe
Jun-13
Nov-13
Apr-14
Sep-14
* 2Y rolling regression against S&P500, 1Y swap spread between Mexico and US, 1M implied
volatility, 3Y breakeven inflation, 10Y UST and 10Y TIIE-IRS and Mbono spread
Source: Banorte-Ixe
Favorable speculative positioning. Since July and as a result of both broader
local and external concerns, peso positions in IMM futures have been cut around
US$ 3.3 billion, going from a US$ 3 billion net long to a US$ 81 million net
short, its lowest level since the beginning of March. The latter has been
accompanied by a strong increase in global dollar longs (mostly concentrated
against EUR and JPY), standing at US$ 41.3 billion, a new historical high. This
signals a strong consensus in favor of USD strength among speculative
accounts. In this respect, crowded positions in dollars could be unwind in case
of negative surprises in the US, providing some relief to currency markets even
if longer term prospects are for the dollar to transition gradually from a funding
to an asset currency given divergences with other regions, a strong economy and
lower liquidity/higher rates going forward. Particularly for the peso, the position
seems light when compared both in US$ or as net contracts as a percent of open
interest relative to its 5-year average. In our view and despite lacking with
contrarian signals (mean-reverting), positioning could limit the impact in case of
further market stress and suggests a positive skew for the currency in case of an
abrupt change in Fed expectations.
USD/MXN – Net positioning in IMM futures*
US$ billion
5
Net positioning (US$ billion, LHS)
USD/MXN – Net long positions in IMM futures
USD/MXN (RHS)
14.5
Standard deviations from 5-year average
2.5
MXN net longs
3
14.0
1
13.5
-1
13.0
-3
12.5
-5
12.0 -1.5
-7
Dec-09
Sep-10
Jun-11
* Negative means net long in MXN
Source: CME, Banorte-Ixe
Mar-12
Dec-12
Sep-13
Jun-14
1.5
0.5
-0.5
11.5 -2.5
Jan-12 May-12 Oct-12
Source: CME, Banorte-Ixe
10
Feb-13
Jul-13
Dec-13
Apr-14 Sep-14
Strategy implications: As previewed in the introduction, we believe the peso
will be influenced by two opposing forces. On one hand, the potential of higher
or abrupt changes in volatility (either way), rates and liquidity as the
normalization process of the Fed begins. On the other hand, Mexico’s gradual
improvement in terms of growth dynamics, prospects and more stable foreign
inflows (FDI) although amid some deterioration in external accounts and local
risks in the implementation of changes already underway due to the structural
reforms.
We believe these will result in a relatively trendless and volatile path for the
Mexican peso in our forecast horizon. Opportunities for buy-and-hold
directional positions will be scarcer, which suggests more tactical and active
trading in the USD/MXN. As the dollar is likely to become gradually more of an
asset currency, other funding options such as the EUR, JPY and CHF could be
more attractive given expected and realized divergences in monetary policies.
Relatedly, countries with weak balance sheets could be more affected by a more
complicated external environment, so relative value trades with high
idiosyncratic components could help dampen for the latter, such as MXN longs
against other EMs with low exposure to US rates or correlation to global
volatility. Relative valuation misalignments and market technical considerations
could also gain weight for determining the appropriateness of investments.
MXN/ZAR
MXN/TRY
0.90
0.18
0.85
0.17
0.80
0.16
0.75
0.15
0.70
0.14
0.65
0.13
0.60
0.12
0.55
0.11
0.50
Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14
0.10
Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14
Source: Bloomberg
Source: Bloomberg
South African rand per Mexican peso
Turkish lira per Mexican peso
Option structures to manage risks and reduce costs could also become more
attractive, such as trading volatility through structures such as straddles /
strangles due to expectations of strong moves but uncertainty about overall
direction. Risk reversals in case of extremes in valuations and event risks could
also be worth considering, along spread products (bull and bear spreads,
seagulls, butterflies) to take advantages of opportunities from changing
volatilities and expectations of trading ranges in a more cost-efficient way.
Disclaimer
The information contained in this document is illustrative and informative so it should not be considered as an advice and/or
recommendation of any kind. BANORTE is not part of any party or political trend.
11
GRUPO FINANCIERO BANORTE S.A.B. de C.V.
Research and Strategy
Gabriel Casillas Olvera
Raquel Vázquez Godinez
Chief Economist and Head of Research
Assistant
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Economic Analysis
Delia María Paredes Mier
Julieta Alvarez Espinosa
Alejandro Cervantes Llamas
Katia Celina Goya Ostos
Julia Elena Baca Negrete
Livia Honsel
Miguel Alejandro Calvo
Dominguez
Rey Saúl Torres Olivares
Lourdes Calvo Fernández
Executive Director of Economic Analysis
Assistant
Senior Economist, Mexico
Senior Global Economist
Economist, U.S.
Economist, Europe
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Analyst, Mexico
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Alejandro Padilla Santana
Juan Carlos Alderete Macal, CFA
Santiago Leal Singer
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FX Strategist
Analyst Fixed income and FX
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Manuel Jiménez Zaldivar
Victor Hugo Cortes Castro
Marissa Garza Ostos
Marisol Huerta Mondragón
José Itzamna Espitia Hernández
María de la Paz Orozco García
Director Equity Research Analyst Telecommunications / Media
Equity Research Analyst
Senior Equity Research Analyst –
Conglomerates/Financials/ Mining/ Chemistry
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Infrastructure / Fibras
Analyst
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Corporate Debt
Tania Abdul Massih Jacobo
Hugo Armando Gómez Solís
Idalia Yanira Céspedes Jaén
Director Corporate Debt
Analyst, Corporate Debt
Analyst, Corporate Debt
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