- Since the beginning of the year, we have maintained a negative outlook on the MXN. While our view remains unchanged, it is important to revisit it now that the US elections are around the corner.
- The main reasons for our stance included prospects of a less attractive volatility-adjusted carry, weakening fundamentals and our expectation of a higher risk premium ahead in the face of heightened political uncertainty.
- On the local front, Morena’s landslide victory resulted in a higher likelihood of approval for the reforms proposed by AMLO in February 2024. The recent (and coming) constitutional changes could have detrimental consequences for the rule of law, which could deter both foreign and domestic investment (particularly nearshoring), as businesses may fear that their rights will not be safeguarded.
- Additionally, in the near term, the most pressing issue for the USDMXN is, naturally, the upcoming US elections, as this election is even more difficult to call than that of 2016, and policies seem to be tougher on Mexico. In this document, we contrast this election to 2016’s and explore the impact of a potential second term for Trump.
- On top of all the above, the current market noise has, in part, stemmed from uncertainty regarding the Fed’s policy decisions, where we expect a continuation of the pace of easing in 25bp cuts, especially following October’s US employment report. Locally, the election outcome could weigh on expectations for Banxico; however, we expect the Board to keep its focus on the local balance of risks, which justifies a cut. The interest rate spread should remain unchanged in the near term, but since volatility will likely stay elevated, the carry will remain unappealing.
- All in all, we continue to expect further MXN depreciation in the days ahead and foresee a climb to levels around 20.50 during the upcoming election. The election outcome will ultimately determine price action by year-end. In line with consensus, we expect an MXN appreciation on a Harris win and further losses otherwise, followed by a mean reversion in both cases. But beyond the immediate market response, our current outlook remains rather cautious, with the USDMXN expected to settle around 19.50-19.80 into early 2025.