USD/MXN: Today’s bounce is overdone - BBH

According to analysts from Brown Brother Harriman, the bounce in the Mexican peso following elections in the State of Mexico is overdone. 

Key Quotes: 

“The so-called quick count showed the PRI ahead by a narrow margin, which triggered a big rally in the peso overnight.  The official running tally is also pointing to a narrow PRI win (34% vs. 31%) with 98% of the votes tallied.  This is hardly good news for the PRI, which has held the governorship of Mexico state for more than 80 years, and last won in 2011 with over 61% of the vote.”

“The next national elections will be held in June 2018.  Polls have Morena candidate Andres Manuel Lopez Obrador (AMLO) currently leading the field.  Former First Lady Margarita Zavala is the likely PAN candidate and is polling second, but she could be challenged by PAN leader Ricardo Anaya. The ruling PRI’s likely candidate is Interior Minister Angel Osorio Chong, who is polling third.”

“AMLO has come to represent a more nationalist brand of politics and this would very likely stoke tensions with the US.  Ironically, part of AMLO’s popularity stems from perceptions that he would stand up better against President Trump than Pena Nieto has so far.”

“Price pressures bear watching, with CPI accelerating to 5.82% y/y in April from 5.35% in March.  May CPI data is due out Thursday and is expected to rise 6.16% y/y.  If so, this would be the highest rate since April 2009, and would move inflation further above the 2-4% target range.  

“This supports the case for higher rates, and we believe Banco de Mexico will hike 25 bp again when it meets June 22.  This is especially true if the Fed hikes June 14, as widely expected.”

“Before today’s drop, USD/MXN had traded largely in the 18.50-19.50 range since mid-March.  Now, the pair is poised to test the November 9 low near 18.1635.  After that, the August low near 17.90 and the April 2016 low near 17.05 come into focus.”

“We think MXN gains will get a bit tougher ahead as positioning becomes a bigger part of the story.  CFTC just reported that net MXN longs were at 75k for the week ended May 30, which is the highest since 2014.”