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Mexico: Changes at the Top – TDS

The succession of Alejandro Diaz de Leon to Governor of Banxico will not bring any substantial change in Banxico’s bias in view of Sacha Tihanyi, Senior Emerging Markets Strategist at TDS.

Key Quotes

“We maintain our call made immediately following the November 9th policy meeting that Banxico will hike 25bps in December.”

“The entry of Jose Antonio Meade into the political fray as a candidate for the PRI in 2018 election is a net positive for the party’s chances in our view, introducing the opportunity to distance itself from the current pall of corruption as well as garner support from potential fractures in the PAN.”

“The fact that inflation expectations have not fallen back towards pre-Trump levels suggests a degree of risk in the high minimum wage increases, amplified by the expectation that inflation will decline more slowly in 2018. There is also risk surrounding MXN, as it relates to NAFTA negotiations.”

“We expect NAFTA volatility to remain a constraint for MXN, at least until the January round (with vol. set to increase if January brings little progress). However, there will be a high-level meeting of NAFTA officials (chief technical negotiators) on December 11th in Washington that may lead to further progress on key sticking points surrounding rules of origin, dispute resolution mechanisms, and the NAFTA sunset clause. While we remain constructive on the ultimate outcome of NAFTA negotiations, we see a non-zero risk that Article 2205 is invoked, which will result in Mexican assets pricing in the apparent end of NAFTA, despite the fact that the invocation of 2205 does not obligate parties to exit the agreement immediately.”

“This enhances downside risks in MXN and potential for inflationary pressures to re-emerge on the margin from depreciation in the currency. In this way, we see little reason to be long the currency until NAFTA is out of the way at the least, but may likely struggle to maintaining any gains that would come from a positive NAFTA resolution, until greater clarity over the election is achieved.”

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