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Mexican peso fails to get boost from big infrastructure spend

Mexico announces huge new infrastructure plan to aid its slumping economy. Super high real interest rates have been underpinning the peso, hurting the economy.

Mexico’s president announced a sweeping $44 billion plan to spend big on infrastructure, a move that failed Tuesday to bolster the peso, which generally though has been firm in recent months on the back of the highest major economy inflation-adjusted interest rates in the world.

But it is likely central bank Banco de Mexico (BoM) will continue to aggressively ease interest rates, especially now that the economy has officially entered recession territory. On Monday, in a revision to second quarter GDP numbers, it was revealed that in the first half Mexico had indeed slipped into a very slight recession.

Super Wide

So, the super wide Mexico interest rate spread is likely to narrow sharply in coming months, especially now that US Federal Reserve has put its easing on hold. BoM’s official rate was cut by a quarter point earlier this month to 7.5% and is expected to fall as low as 6% in the first half of next year.

BoM has kept interest rates high despite the poor economy in order to stabilize the value of the peso, which has range traded for the last two years but was slaughtered between 2013 and early 2017, losing about 40 percent of its value against the US dollar.

Trade higher

USD/MXN traded about 25 pips higher despite the infrastructure stimulus news for the Mexican economy, changing hands in late New York trade Tuesday around 19.515 pesos. USD/MXN has been range trading for most of the year, with the 19.5 peso level the middle of that range.

President Andres Manuel Lopez Obrador, a leftist who was just elected, has pledged to raise Mexico’s GDP growth to 4%, but a controversial decision to cancel a huge half constructed $13 billion airport in Mexico City and a deep slump in the construction sector, as well as declining output in the key oil sector, have led to widespread skepticism that the president can reach that growth goal.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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