6 Apr 2015
Is the Mexican peso decoupling from the Brazilian Real? – Rabobank
FXStreet (Edinburgh) - Strategist Christian Lawrence at Rabobank reviewed the correlation between the MXN and BRL.
Key Quotes
“In terms of the currency, we maintain the view that north of 15, MXN looks cheap. Carstens has himself noted that “Banxico seeks to avoid MXN moving far from fundamentals”.
“Indeed, the Bank announced a new FX intervention policy to complement the pre-existing USD auctions that are triggered by a larger-than-1.5% daily move in USD/MXN”.
“The new programme offers USD 52mn at any price. For a market as deep and liquid as MXN this is a tiny sum, but it portrays the Bank’s intentions and highlights growing concerns over currency weakness”.
“If we think MXN looks cheap, why has it continued to trade north of 15? We would argue that this is a product of consistent USD strength which we expect to continue (albeit with a consolidation in the middle of the year if we are correct and the Fed does not raise rates), broad-based EM selling, and in particular, the rapid and extensive sell-off in BRL”.
“The correlation between USD/MXN and USD/BRL has been significant for most of the past decade and at +0.62 (3-mth daily % change basis) it is particularly strong at the moment”.
“Given that MXN often trades a proxy hedge for the LatAm region this is no surprise, particularly given the panic facing BRL at the moment”.
“That said, we do expect to see this correlation break down somewhat as regional contagion fades and MXN appreciates against USD while BRL maintains its downward trajectory. In summary, we expect MXN to remain at the mercy of USD and to a lesser extent BRL but over the longer term fundamentals are likely to provide support for MXN”.
Key Quotes
“In terms of the currency, we maintain the view that north of 15, MXN looks cheap. Carstens has himself noted that “Banxico seeks to avoid MXN moving far from fundamentals”.
“Indeed, the Bank announced a new FX intervention policy to complement the pre-existing USD auctions that are triggered by a larger-than-1.5% daily move in USD/MXN”.
“The new programme offers USD 52mn at any price. For a market as deep and liquid as MXN this is a tiny sum, but it portrays the Bank’s intentions and highlights growing concerns over currency weakness”.
“If we think MXN looks cheap, why has it continued to trade north of 15? We would argue that this is a product of consistent USD strength which we expect to continue (albeit with a consolidation in the middle of the year if we are correct and the Fed does not raise rates), broad-based EM selling, and in particular, the rapid and extensive sell-off in BRL”.
“The correlation between USD/MXN and USD/BRL has been significant for most of the past decade and at +0.62 (3-mth daily % change basis) it is particularly strong at the moment”.
“Given that MXN often trades a proxy hedge for the LatAm region this is no surprise, particularly given the panic facing BRL at the moment”.
“That said, we do expect to see this correlation break down somewhat as regional contagion fades and MXN appreciates against USD while BRL maintains its downward trajectory. In summary, we expect MXN to remain at the mercy of USD and to a lesser extent BRL but over the longer term fundamentals are likely to provide support for MXN”.