The embattled Mexican peso is expected to make a comeback in the first half of the year, according to currency market forecasts reported yesterday by the Bloomberg news agency.
On average, analysts predict that the peso will strengthen 1.9% in the first six months of 2018, largely because of the sharp drop it experienced at the end of last year.
The peso slumped to its lowest level in nine months last month on the back of a threat to investment posed by fiscal reform in the United States, high inflation, uncertainty about NAFTA and concerns that Andrés Manuel López Obrador could win the presidential election in July.
Efforts to support the peso by selling off foreign exchange hedges ultimately failed to apply the brakes on the tumbling currency, which slumped to just over 20 to the US dollar on December 26 before strengthening slightly.
Although the 1.9% average increase seems modest, it is enough to put the peso on track to be the best performer in the first half of the year among 16 major currencies tracked by Bloomberg.
Some forecasts, however, are considerably more optimistic, such as that made by Citigroup Inc., which expects the peso to recover by more than 5% over the next six to 12 months
The bank’s head of Latin American economics, Ernesto Revilla, said that in addition to the expected recovery from its slump, the stronger than average forecast for the peso was due to Mexico’s potential for growth, its stronger fiscal position and a narrowing current account deficit.
In the longer term, Citigroup expects the peso to reach 17 to the US dollar, a 14% increase on its current value.
“The Mexican peso still looks cheap relative to its long-term value,” said Revilla, a former chief economist at the federal Finance Secretariat.
While all the leading forecasters tracked by Bloomberg expect the peso to rally, one analyst at Swiss financial services company UBS AG said that he still wouldn’t recommend the peso to investors.
“There are more interesting opportunities out there in the emerging world,” Alejo Czerwonko said.
Czerwonko too predicts that the peso will strengthen, albeit modestly to 19 to the US dollar by June, but he warned that it remains vulnerable to economic and political uncertainty.
“The market is currently partially but not fully pricing in a failure of NAFTA or a López Obrador presidency, which means that if either one were to materialize, we would expect a weaker trend for the peso,” he said.
Citigroup’s forecast also assumes “macroeconomic stability” and “continued implementation of economic reforms,” Revilla said.
However, if the winner of the July 1 election changes Mexico’s economic course, the bank could reconsider its outlook.
Source: Bloomberg (en)