Banorte-Ixe FI/FX Strategy
Mexico , x
Stronger Mexican peso forecasts after a
series of positive surprises
March 30, 2017
www.banorte.com
 We revise our year-end USD/MXN forecast from 22.30 to 19.50 per dollar,
expecting a much stronger path for our currency after a series of positive
surprises, mainly from the new U.S. administration
 We now expect a more favorable result in NAFTA negotiations and in the
relationship with the U.S. Other positive and recent developments include
the FEC’s hedging program, signs of stronger external accounts, and
protection of higher carry to counter the MXN use as a hedge
 Among the main risks to our new outlook, we highlight a negative turn in
NAFTA negotiations and border-adjustment taxes, the outlook for Fed rate
hikes, and the 2018 Presidential Election process in our country
Gabriel Casillas
Chief Economist and Head of Research
[email protected]
Alejandro Padilla
Head Strategist - Fixed-Income and FX
[email protected]
Juan Carlos Alderete, CFA
FX Strategist
[email protected]
Santiago Leal
Analyst Fixed Income and FX
[email protected]
Strong downward revision to our USD/MXN forecasts. We have substantially
modified our currency forecasts for the rest of 2017, with the year-end estimate
from 22.30 to 19.50 per dollar. We humbly recognize that several of the risks
considered in our latest update1 have dissipated. By far, the most positive surprise
has been the more constructive rhetoric by U.S. officials about upcoming NAFTA
negotiations. Moreover, statements about taxes on remittances and payment of the
Border Wall also point to a better outlook and diminished risks. Despite lingering
uncertainty about their end result, our base-case is more positive, implying a much
lower risk premium in MXN compared with our previous assumptions. This has
been accompanied by other positive and unexpected news. We highlight the FEC’s
hedging program separating FX and monetary policy2 and better external account
data, particularly the non-oil trade balance. We underestimated the protection that
higher carry (after Banxico’s accumulated rate hikes last year) would provide in
bouts of risk aversion and in inducing portfolio inflows in risk-on periods. On the
contrary, the possibility of pressures and greater volatility is still present, most
likely tilted towards 2H17. Among them if border-adjustment taxes (BAT) are
introduced in the U.S., market underpricing of hike expectations by the Fed, and
some structural challenges in oil production3. Local risks to watch include the
possibility of credit rating downgrades and political uncertainty ahead of the 2018
Presidential Election
USD/MXN forecasts
Pesos per dollar, end of period
22.4
22.0
21.6
21.2
20.8
20.4
20.0
19.6
19.2
18.8
18.4
18.0
Sep-16
New
Previous
22.00
22.30
20.95
20.10
19.60
18.62
Nov-16
Jan-17
Mar-17
18.50
May-17
19.50
Forecasts
Jul-17
Sep-17
Nov-17
Source: Banorte-Ixe
1
Document for distribution among
public
Short-term risks for the Mexican currency have balanced, resulting in a lower
risk premia. The peso has outperformed all its EM peers since President Trump
started his administration on January 20th. The Mexican currency has appreciated
an inch above 15%, after reaching an all-time-low of USD/MXN 22.04. Several
short-term risks, some of them country-specific, have faded or moved towards
2018. In our view, five main factors have been driving investor’s expectations
about the Mexican peso and will be present in 2017 and 2018:
 Trump-related topics. President Trump adopted a radical rhetoric on three main
themes about Mexico: NAFTA, immigration and the construction of a wall
throughout the entire border. These were strong concerns for Mexican
authorities during Trump’s campaign. Nevertheless, U.S. officials have shown a
more conciliatory tone. In addition to negotiations that could be less harmful for
Mexico than previously thought, the lack of congressional support last week in
the Affordable Health Care Act (i.e. repealing Obamacare) suggests less
political risk of a harmful negotiation for the three countries within NAFTA or a
BAT. Lastly, the timing and implementation suggests this risk could have
shifted towards 2018
 Geopolitical dynamics. Investors have expressed their fears about worldwide
change in the political paradigm since last year (e.g. Brexit), especially with
upcoming elections in France and Germany that could pose risks to political
stability in the European Union. However, the loss of right-wing liberal Geert
Wilders in the Dutch Elections, in tandem with Marine Le Pen losing steam in
recent polls, suggest anti-establishment sentiment waning momentum.
Nevertheless, Italy continues in the spotlight and could induce an increase in
risk premia worldwide by the end of the year. Another situation to bear in mind
is the 2017/2018 electoral process in Mexico. This year’s State of Mexico
Elections will be on investor’s radar, as it could be a good barometer for the
2018 Presidential Elections. Political forces in Mexico have been shifting
recently, with left-wing rhetoric gaining some ground. In our view, this will
weigh on Mexican assets in the 1H18 in a more significant fashion. However,
local elections (e.g. State of Mexico) on June 4th, 2017 will be important for
market participants
 Monetary policy. Taking into account today’s policy decision4, Banxico has
increased its reference rate by 350bps since December 2015. This has resulted
in a significant improvement in carry gains for the local currency and has also
been supportive for the peso (in addition to the FEC’s hedging program
announced this year), especially when compared to other EM central banks with
an easing cycle (e.g. Brazil, Chile and Colombia). On the other hand, the effect
of Fed’s policy path ahead is uncertain. A dovish Fed could result in better
conditions for risky assets. Nevertheless, this rhetoric could be a result of the
central bank’s perception of an economy losing steam, which is not positive for
the Mexican economy
2
 New oil reality. Oil production dropped last year 10.6% from 2.28 Mbbl/d to
2.04 Mbbl/d within a context of low oil prices since 2014. This could pose a
risk for public finances in the short-term as production has been declining since
2003. However, the positive results of the oil fields bidding process have
improved the outlook. Additionally, if the U.S. economy loses dynamism, the
recent surge in manufacturing exports (that explain the sizable recovery in the
non-oil trade balance) could wane and renew the focus on the risks for the
financing of the current account deficit
 Credit ratings. Our base case scenario is a one-notch downgrade of Mexico’s
sovereign rating from the three major agencies this year: Moody’s (A3), S&P
(BBB+) and Fitch (BBB+). Mexican assets are already trading with an
embedded Baa2/BBB rating, suggesting that price action could be muted from
this outcome, especially as we see the credit outlook switching from Negative to
Stable, leaving the country in the investment-grade class with at least a onenotch buffer from the lower bound. However, the risk to this central scenario
lies on the results of NAFTA/BAT negotiations, the delivery of fiscal and
growth objectives, and the 2017/2018 electoral process. On the other hand,
yesterday’s announcement of Banxico’s operating surplus5 is a positive shortterm credit event
3
References
(1) “Fixed-Income, FX and Commodities Update – The Trump aftershock”, published on December 2nd,
2016, <pdf>
(2) “Reassessing our rates and peso forecasts after the FEC’s new mechanism”, published on February 21st,
2017, <pdf>
(3) “Mexican Peso: Catching up to crude reality”, published on August 29th, 2016, <pdf>
(4) “Banxico hikes 25bps, in line with our forecast”, published on March 30th, 2017, <pdf>
(5) “Banxico’s operating surplus locks in this year’s MoF fiscal consolidation goals”, published on March
29th, 2017, <pdf>
4
Track of the latest fixed-income trade recommendations
Trade idea
Entry
5y10y TIIE-IRS steepener
5y10y TIIE-IRS steepener
Long Mbono Jun'21
Long Udibono Jun'19
Target
28bps
35bps
5.60%
1.95%
Stop-loss
43bps
50bps
5.35%
1.65%
Receive 1-year TIIE-IRS (13x1)
3.92%
3.67%
Long spread 10-year TIIE-IRS vs US Libor
436bps
410bps
Receive 9-month TIIE-IRS (9x1)
3.85%
3.65%
Spread TIIE 2/ 10 yrs (flattening)
230bps
200bps
Long Mbono Dec'24
6.12%
5.89%
Relative-value trade, long 10-year Mbono (Dec'24) / flattening of the curve
Pay 3-month TIIE-IRS (3x1)
3.24%
3.32%
Pay 9-month TIIE-IRS (9x1)
3.28%
3.38%
Pay 5-year TIIE-IRS (65x1)
5.25%
5.39%
Long Udibono Dec'17
0.66%
0.45%
Relative-value trade, long Mbonos 5-to-10-year
Receive 2-year TIIE-IRS (26x1)
3.75%
3.55%
Receive 1-year TIIE-IRS (13x1)
4.04%
3.85%
Long Udibono Jun'16
0.70%
0.45%
Long Mbono Jun'16
4.47%
3.90%
Receive 6-month TIIE-IRS (6x1)
3.83%
3.65%
Receive 1-year TIIE-IRS (13x1)
3.85%
3.55%
Long Udibono Dec'17
1.13%
0.95%
Receive 9-month TIIE-IRS (9x1)
4.50%
4.32%
Spread TIIE-Libor (10-year)
390bps
365bps
Receive 1-year TIIE-IRS (13x1)
4.22%
4.00%
Long Udibono Jun'22
1.40%
1.20%
Receive 1-year TIIE-IRS (13x1)
4.60%
4.45%
Long Mbono Nov'42
6.22%
5.97%
Long Udibono Dec'13
1.21%
0.80%
Receive 1-year TIIE-IRS (13x1)
4.87%
4.70%
Receive TIIE Pay Mbono (10-year)
46bps
35bps
Spread TIIE-Libor (10-year)
410bps
385bps
Long Udibono Dec'12
+0.97%
-1.50%
Long Udibono Dec'13
+1.06%
0.90%
Closed
Status
P/L
Initial date
End date
2
18bps
25bps
5.80%
2.10%
31bps
47bps
5.43%
2.10%
Closed
Closed
Closed
Closed
Profit
Profit
Profit
Loss
15-Feb-17
5-Oct-16
13-Jul-16
13-Jul-16
15-Mar-17
19-Oct-16
16-Aug-16
16-Aug-16
4.10%
456bps
4.00%
250bps
6.27%
3.87% 1
410bps
3.65%
200bps
5.83%
3.20%
3.20%
5.14%
0.82%
3.30%
3.38%
5.14%
0.82%
3.90%
4.20%
0.90%
4.67%
4.00%
4.00%
1.28%
4.65%
410bps
4.30%
1.55%
4.70%
6.40%
1.40%
5.00%
54bps
430bps
+1.20%
+1.35%
3.90%
3.85%
0.90%
4.06%
3.81%
3.85%
1.35%
4.31%
412bps
4.30%
0.97%
4.45%
5.89%
1.40%
4.69%
54bps
342bps
-6.50%
0.90%
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Profit
Profit
Profit
Profit
Profit
Profit
Profit
Profit
Loss
Loss
Profit
Loss
Profit
Loss
Profit
Profit
Flat
Loss
Profit
Loss
Loss
Profit
Profit
Profit
Loss
Profit
Loss
Profit
Profit
Profit
12-Nov-15
30-Sep-15
3-Sep-15
26-Jun-15
13-Mar-15
22-Dec-14
29-Jan-15
29-Jan-15
4-Nov-14
4-Jul-14
5-May-14
11-Jul-14
6-Feb-14
6-Jan-14
7-Jun-13
10-Oct-13
10-Oct-13
9-Aug-13
21-Jun-13
7-Jun-13
19-Apr-13
15-Mar-13
1-Feb-13
1-Feb-13
1-Feb-13
11-Jan-13
19-Oct-12
21-Sep-13
1-May-12
1-May-12
8-Feb-16
23-Oct-15
18-Sep-15
29-Jul-15
19-Mar-15
6-Feb-15
29-Jan-15
29-Jan-15
14-Nov-14
26-Sep-14
26-Sep-14
10-Sep-14
10-Apr-14
4-Feb-14
21-Nov-13
25-Oct-13
25-Oct-13
10-Sep-13
12-Jul-13
11-Jun-13
31-May-13
3-May-13
7-Mar-13
7-Mar-13
15-Apr-13
24-Jan-13
8-Mar-13
8-Mar-13
27-Nov-12
14-Dec-12
Initial Date
20-Mar-15
5-Jan-15
15-Dec-14
21-Nov-14
10-Sep-14
27-Aug-14
6-May-14
31-Oct-13
11-Oct-13
26-Jul-13
29-Apr-13
11-Mar-13
11-Jan-13
10-Dec-12
End date
20-Apr-15
15-Jan-15
5-Jan-15
3-Dec-14
26-Sep-14
4-Sep-14
13-Jun-14
8-Nov-13
17-Oct-13
21-Aug-13
9-May-13
13-Mar-13
27-Feb-13
17-Dec-12
1. Carry + ro ll-do wn gains o f 17bps
2. Clo sed belo w target and befo re the pro po sed ho rizo n date due to changes in market co nditio ns that have differed fro m o ur expectatio ns.
Track of the latest FX trade recommendations*
Trade Idea
Long USD/MXN
Short EUR/MXN
Tactical trade: Long USD/MXN
Tactical trade: Long USD/MXN
Short USD/MXN
Tactical trade: Short EUR/MXN
USD/MXN call spread**
Directional short USD/MXN
Limit short USD/MXN
Speculative short USD/MXN
Short EUR/MXN
Long USD/MXN
Long USD/MXN
Tactical limit short USD/MXN
Entry
14.98
17.70
14.40
13.62
13.21
17.20
12.99
13.00
13.25
12.70
16.05
12.60
12.60
12.90
Target
15.50
n.a.
n.a.
n.a.
n.a.
n.a.
13.30
12.70
12.90
12.50
15.70
12.90
12.90
12.75
Stop-loss
14.60
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
13.25
13.46
13.00
16.40
12.40
12.40
13.05
Closed
15.43
16.90
14.85
14.11
13.64
17.03
13.02
13.28
-13.00
15.69
12.40
12.85
--
Status
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Closed
Cancelled
Closed
Closed
Closed
Closed
Cancelled
P/L*
Profit
Profit
Profit
Profit
Loss
Profit
Loss
Loss
-Loss
Profit
Loss
Profit
--
* Total return does not consider carry gain/losses
** Low strike (long call) at 13.00, high strike (short call) at 13.30 for a premium of 0.718% of notional amount
Source: Banorte-Ixe
Disclaimer
The information contained in this document is illustrative and informative so it should not be considered as an advice and/or
recommendation of any kind. BANORTE is not part of any party or political trend.
5
GRUPO FINANCIERO BANORTE S.A.B. de C.V.
Research and Strategy
Gabriel Casillas Olvera
Chief Economist and Head of Research
[email protected]
(55) 4433 - 4695
Raquel Vázquez Godinez
Assistant
[email protected]
(55) 1670 - 2967
Executive Director of Economic Analysis
Senior Economist, Mexico
Senior Global Economist
[email protected]
[email protected]
[email protected]
(55) 5268 - 1694
(55) 1670 - 2972
(55) 1670 - 1821
Economist, Regional & Sectorial
[email protected]
(55) 1670 - 2220
Economist, International
Economist, National
Analyst (Edition)
[email protected]
[email protected]
[email protected]
(55) 1670 - 2252
(55) 1670 - 2957
(55) 1103 - 4000 x 2611
Head Strategist – Fixed income and FX
FX Strategist
Analyst Fixed income and FX
[email protected]
[email protected]
[email protected]
(55) 1103 - 4043
(55) 1103 - 4046
(55) 1670 - 2144
[email protected]
(55) 5268 - 1671
[email protected]
(55) 1670 - 1800
[email protected]
(55) 1670 - 1719
[email protected]
(55) 1670 - 2249
[email protected]
(55) 1670 - 2250
[email protected]
(55) 1670 - 2251
Director Corporate Debt
Analyst, Corporate Debt
Analyst, Corporate Debt
[email protected]
[email protected]
[email protected]
(55) 5268 - 1672
(55) 1670 - 2247
(55) 1670 - 2248
Armando Rodal Espinosa
Head of Wholesale Banking
[email protected]
(55) 1670 - 1889
Alejandro Eric Faesi Puente
Head of Global Markets and Institutional Sales
[email protected]
(55) 5268 - 1640
Alejandro Aguilar Ceballos
[email protected]
(55) 5268 - 9996
[email protected]
(55) 5004 - 1002
[email protected]
(81) 8318 - 5071
Jorge de la Vega Grajales
Head of Asset Management
Head of Investment Banking and Structured
Finance
Head of Transactional Banking, Leasing and
Factoring
Head of Government Banking
[email protected]
(55) 5004 - 5121
Economic Analysis
Delia María Paredes Mier
Alejandro Cervantes Llamas
Katia Celina Goya Ostos
Miguel Alejandro Calvo
Domínguez
Juan Carlos García Viejo
Francisco José Flores Serrano
Lourdes Calvo Fernández
Fixed income and FX Strategy
Alejandro Padilla Santana
Juan Carlos Alderete Macal, CFA
Santiago Leal Singer
Equity Strategy
Manuel Jiménez Zaldivar
Victor Hugo Cortes Castro
Marissa Garza Ostos
José Itzamna Espitia Hernández
Valentín III Mendoza Balderas
Itzel Martínez Rojas
Director Equity Research —
Telecommunications / Media
Equity Research Analyst
Senior Equity Research Analyst –
Conglomerates / Financials/ Mining / Chemistry
Equity Research Analyst – Airlines / Airports /
Cement / Infrastructure / Fibras
Equity Research Analyst – Auto Parts/
Consumer Discretionary / Real Estate / Retail
Analyst
Corporate Debt
Tania Abdul Massih Jacobo
Hugo Armando Gómez Solís
Idalia Yanira Céspedes Jaén
Wholesale Banking
Arturo Monroy Ballesteros
Gerardo Zamora Nanez
Luis Pietrini Sheridan
Head of Private Banking
[email protected]
(55) 5004 - 1453
René Gerardo Pimentel Ibarrola
Head of Asset Management
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(55) 5268 - 9004
Ricardo Velázquez Rodríguez
Head of International Banking
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(55) 5004 - 5279
Víctor Antonio Roldan Ferrer
Head of Corporate Banking
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(55) 5004 - 1454