Wall Street Can’t Quit the Mexican Pesoby
Mobius, BNP Paribas and Goldman seeing opportunities with peso
Natixis says only thing for certain is a wild ride ahead
As Wall Street analysts raise the idea there might be big rewards to reap by investing in the Mexican peso, the currency’s top forecaster can’t find anything to get excited about.
Juan Carlos Rodado, the head of research at Paris-based bank Natixis SA, expects more losses after the peso sank 13 percent since Donald Trump’s election, saying Mexico will suffer if the new president makes good on his protectionist pledges. Whether he does is anyone’s guess, but there’s certainly no reason to go long, says Rodado, who had the best track record in the second half among forecasters tracked by Bloomberg.
That stands in contrast to views from the likes of Goldman Sachs Group Inc., BNP Paribas SA and Mark Mobius, the executive chairman of Templeton Emerging Markets Group. While peso forecasters have been consistently burned in the past, all of them see gains for the currency on the idea that even as tension escalates over a proposed border wall and trade measures, the selloff is overdone and Mexico’s fundamentals are much stronger than the price of the peso suggests. There’s bound to be a market correction, they say.
“The MXN should appreciate going forward and, while there are uncertainties down the road and the risk is high, so is the reward," BNP analysts wrote in a note this week.
Not so fast, says Rodado.
“Mexico is going to have to reinvent their growth model, which is at the moment based on trade with its neighbor," he said in an interview from his office in New York. “Diversifying your foreign trade takes time. It’s not something you can do overnight."
The bullish forecasts seemed all the more discordant Thursday as the peso reversed earlier gains and sank 1 percent to about 21.28 per dollar after President Enrique Pena Nieto canceled a meeting with the U.S. president planned for next week. A dispute over Trump’s border wall plan has exploded into a showdown that threatens one of the world’s biggest bilateral trading relationships.
Rodado says it’s impossible to know what the fair value of the peso is given the lack of clarity on U.S. trade policy, and nothing is certain expect for volatility and slower economic growth. Natixis sees the peso at 22 per dollar by mid-April, 22.5 by mid-July and 23 by mid-Jan 2018.
So far, investors appear to be coming down on the pessimistic side. The peso is the second-worst performing major currency this year, with only the Turkish lira suffering more. Futures traders have increased their net short peso positions for three consecutive weeks to the highest since Oct. 4, according to data from Commodity Futures Trading Commission.
Trump twice sent the peso tumbling this year when he took to Twitter to celebrate Ford Motor Co.’s decision to not move operations to Mexico from the U.S. and when calling for a "border tax" for companies that produce in Mexico to export to the U.S. The automobile industry brings more foreign funds to Mexico than any other industry, while 80 percent of Mexico’s exports are sent to the U.S.
But analysts on average see the peso gaining about 1.4 percent to 21 per dollar at the end of the year, the second-most among major currencies, according to data compiled by Bloomberg. Goldman Sachs sees it appreciating to 19 per dollar in a year, while BNP has recommended buying 2017 forwards.
UBS Group AG analysts, who had been bearish on the peso for months, asked in a note to clients this week "Has the Mexican Peso’s moment arrived?" The answer was a bit equivocal, but the bank said there may be “a great buying opportunity.”
Mobius says the peso’s levels point to a 20 percent undervaluation against purchasing-power parity, the idea that the same product should sell at the same price in different countries.
The peso has been hit by myriad factors over the past two years as it sunk 31 percent to record lows. The collapse in oil prices was followed by increased doubts about the outlook for global growth. Then came Britain’s vote to exit the European Union and Trump’s anti-trade rhetoric.
Throughout this period, most analysts have been way too optimistic on the currency, overestimating the positive impact that economic reforms passed by the current administration would have on the economy. Strategists forecast gains for the Mexico peso every year for the past four years. Whoops. Every year it dropped.
The overwhelming risk to Mexico now is that the U.S. will impose trade barriers, such as a 35 percent border tax proposed by Trump, Rodado said. Half of foreign direct investment to Mexico comes from the U.S., he pointed out.
“It’s very hard to have a one-directional view when it comes to the Mexican currency because there’s going to be a lot of noise,” he said.