Where Can Mexico Go?

Mexico has been dealt a poor hand, but it appears President AMLO is playing it poorly. Unlike other major countries in the regions (though ironically, Brazil's president, Bolsonaro, is taking a similar stance) AMLO has not sought to curtail social life or impose travel restrictions. He warned that weakening the economy would hurt the poor. A federal court ordered the Mexican government to take "all necessary" action to protect people from the virus. Mexico is also highly urbanized and reliant on public transportation, making social distancing difficult under any circumstance.

The response to the public health crisis is sorely lacking, and official help to mitigate the economic shock is missing-in-action. AMLO warned businesses and investors he is opposed to corporate "bailouts" (support, loans, guarantee) or tax amnesty. He also indicated no intention to draw on the standing line of credit with the IMF ($61 bln).  

The central bank announced an emergency 50 bp rate cut on March 20 to 6.50%, five days after the FOMC brought its policy rate target to the zero-bound. Banxico also some other liquidity measures, and dollar auctions can re-activated via the swap lines from the Federal Reserve. However, given the economic hit coming, rates have to be slashed. This has implications for the bond market as well as the peso. The 200-300 basis point rate cuts necessary to bring the real rate closer zero might not all be translated into the long-end of the curve, but a good part should, as inflation expectations also fall.  

The peso has plunged to record lows. Speculators in the futures market have slashed their gross long position by three-quarters, but at 55.k contracts (as of March 17), the liquidation is not over. The bears have yet to show their hands claws. The gross short position stood at 21.7k contracts, it has just begun rising from the 16.1k (March 3), which was the least since 2014.    

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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