The pandemic has hit hard on emerging markets currencies, but a new report by Oxford Economics predicts that the Mexican peso (MXN) is stabilizing after suffering intense pressure in recent months.
According to the consultancy, since falling to an all-time low of MXN 25 per dollar in late March, the currency has recovered some ground, stabilizing at MXN 23 per dollar, in line with its assessment of a “fair value” exchange rate. Oxford’s models suggest that unless another risk-off episode takes hold, the peso is bound to remain within MXN 22-23 per dollar for the next two years.
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Oxford’s forecast still has a negative long-term view on Mexican growth during Andrés Manuel López Obrador administration, but it considers that the country’s peso will not depreciate much further from current levels.
The main reason for the stabilization, says a report by the firm, is that Banxico, Mexico’s central bank, will keep compensating the fiscal and institutional deterioration by not cutting rates as low as other emerging markets, “offering investors fat interest rate differentials” compared to the U.S. market.
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According to Oxford Economics, the Mexican peso (MXN) is the second-most traded currency among emerging markets and one of the few currencies trading in a 24-hour market. Surveys show that 83% of the daily turnover takes place outside Mexico because the peso is the default hedge for most operations in Latin America. “Swings in the Mexican peso tend to correlate to broader regional and emerging-market trends rather than domestic fundaments”, says Oxford.
The coronavirus pandemic has sent Latin America currencies down 15% versus the dollar so far this year. The Oxford report attributes this as investors fearing that poor welfare states together with plunging commodity prices would hit Latin America harder than any other place. In Mexico’s case, the sharp rise in country-risk assessments, and the crash in oil prices explained most of the peso depreciation.
