Mexico FX Struggles Due to U.S. Election, Coronavirus Outbreak
Mexico will be ending the first quarter on a bad note due to U.S. election campaign and fears over the coronavirus outbreak, with Mexico's peso vulnerable to further slumps, a Reuters poll revealed.
According to an article by WHBL, the median estimate of 12 strategists polled from Feb. 28 to March 3 showed the currency is set to trade at 19.5250 per U.S. dollar in one year close to its levels earlier this week, followed by the U.S. Federal Reserve's move to cut interest rates on Tuesday.
Following Fed's surprise rate cut, Bank of Mexico, or Banco de Mexico (Banxico) as it is known locally, was also seen cutting its key interest rate by 50 basis points at its monetary policy meeting in late March, 25 basis points more than a forecast two weeks ago a Citibanamex survey showed on Thursday.
In a bid to shield the world's largest economy from the impact of the coronavirus, the Fed cut interest rates by a half percentage point to a target range of 1.00 percent to 1.25, according to an article by WKZO.
However, the emergency move failed to comfort U.S. financial markets plagued by worries about a deeper, lasting slowdown.
"Considering the emergency cut to the Fed's target rate ... the consensus of our Citibanamex Expectations Survey anticipates that Banxico will respond accordingly," the survey said.
Baxinco slashed the key rate for a fifth straight meeting on Feb. 13, lowering it 25 basis points to 7.0 percent.
The survey, conducted by the Mexican subsidiary of U.S. bank Citigroup among 25 analysts, has forecasted the benchmark interest rate in Mexico to hit at 6 percent at the end of 2020 and at 5.75 percent at the end of 2021, down from previous estimates of 6.38 percent and 6 percent, respectively.
On March 26, Banxico will hold another monetary policy meeting.
After the Fed's move, Mexican peso rose 1.3 percent, giving some relief to Latin American foreign exchange markets.
In the second half of last month, Mexican peso slumped 5.5 percent. Aside from the Mexican currency, other emerging markets have been affected by the flight to safe-haven assets, as the coronavirus continue to proliferate outside China. Mexico's Ministry of Health released a report on Sunday of the fifth confirmed COVID-19 case in the country.
Last week, President Donald Trump said he could close the U.S. southern border to control the spread of the disease, which may risk further losses to the Mexican currency.
"As the election cycle in the U.S. picks up speed and headline volatility increases, we expect USD/MXN to resume an upward (weaker) trend into late Q1 and early Q2," CIBC analysts wrote in a monthly report for March, right before Fed moved to cut the interest rates.
It can be recalled that in the run-up to the 2016 presidential elections, Mexican peso lost 7.6 percent from its strongest level that year until election day, as Trump promised to dismiss the North American Free Trade Agreement (NAFTA).
Aside from said factors, Mexico's poor growth and optimistic budget assumptions also affect their national currency.
"We foresee these concerns returning to the main stage ... as credit rating agencies assess the country's fiscal stance in Q2 2020," CIBC said.
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