Mexico: we cannot rule out another package of emergency measures, but unlikely - BBH

The Mexican peso on Friday hit record lows versus the US dollar. According to analysts from Brown Brother Harriman, recent MXN underperformance has been disappointing and shows no sign of going away anytime soon.

Key Quotes:

“In the US, Recent polls suggest Donald Trump has narrowed Hillary Clinton’s lead. Of course, the media is playing up the notion that a Trump presidency would be disastrous for Mexico and Mexican assets. We note that most Electoral College models still show Clinton as the likely winner of the 270 electoral votes needed to become president. Also, even if Trump were to win, there is always a difference between what a candidate says and what the winner eventually does. For now, we downplay the “Trump Effect” on Mexico.”

“The central bank next meets September 29. The central bank has hiked rates 50 bp twice this year, in February intra-meeting and then at the regular June meeting that took the policy rate to 4.25%. It will be a tough call this month given the weak state of the economy, but we see a compromise 25 bp hike to 4.50% as recent peso weakness is likely to add to the incipient price pressures. “

“Market fears of FX intervention could help check the pace of peso weakness a bit in the coming days. Friday was a perfect day for the central bank to undertake discretionary FX intervention in illiquid markets, but it did not due to the holiday. We do not think there is any exchange rate level that triggers discretionary intervention, but rather it is the pace of weakness. If things get worse for Mexico and we see heightened risks of large, destabilizing moves in the exchange rate, then the odds of FX intervention will rise.”

“We think that high volatility and the return of significant MXN underperformance within EM would be the main triggers for Banxico FX intervention, rather than any particular level of the exchange rate.!

“While we cannot rule out another package of emergency measures (FX intervention, rate hike, fiscal cuts) like we saw in February, it seems unlikely at this juncture. If the last one had no lasting impact, why should another be any different? Instead, Banxico should focus on preventing one-sided markets like we saw Friday.”