20171016-法国巴黎银行-LATIN_AMERICA_STRATEGY_9页_250kb

Summary of the Latin America Strategy Document - Mexico FX and IR Analysis

Core Content

This document provides an analysis of the Mexican Peso (MXN) and outlines the potential lines of defense that the Mexican authorities may use to manage FX depreciation and liquidity risks. It also includes the strategy recommendations for managing exposure in the Mexican fixed income market.

Key Observations

• MXN Performance: The Mexican Peso has underperformed other currencies in EM/Latam, primarily due to the strengthening US Dollar, NAFTA negotiations, and domestic political developments.
• Fair Value Estimate: The short-term fair value of the MXN against the USD suggests a 3.5% undervaluation, a smaller divergence compared to earlier in the year.
• Currency Basket: The MXN's relative performance against a basket of currencies is shown in Chart 2, which includes BRL, COP, CLP, PEN, CNY, RUB, TRY, KRW, ZAR, INR, PLZ, HUF, MYR, THB, IDR, and PHP.

Lines of Defence

1) FX Swaps Program

• Overview: A non-deliverable forward (NDF) program settled in local currency, with no impact on international reserves.
• Usage: The program has been used for MXN 1bn in March 2017 and has only rolled over maturing amounts since then.
• Assessment: This is considered the first line of defense due to:
  • Already in place
  • Market assimilation
  • Limited use of the allocated amount
  • Positive impact on the MXN in the past

2) International Reserves

• Usage: The FEC has used international reserves for USD sales in the past, including USD 28bn between 2015 and 2016.
• Optimal Reserve Levels: Current reserves (USD 172.8bn) are deemed sufficient for a modest sudden stop event, but insufficient for a more severe crisis.
• Assessment: This is considered a second line of defense, less likely to be used due to the current reserve adequacy.

3) IMF Flexible Credit Line (FCL)

• Overview: A precautionary agreement with the IMF, renewed multiple times, with a recent credit line of SDR 62.4bn (USD 88bn).
• Usage: Not tapped yet, due to the country's sound macroeconomic fundamentals.
• Assessment: Low probability of use as a tool for FX intervention.

4) Monetary Policy

• Current Policy: Banxico has already tightened policy rates and believes current rates are aligned with inflation targets.
• Assessment: Extremely unlikely to be used to curb MXN depreciation, unless there are signs of FX-pass-through affecting the disinflation process.

Strategy Recommendations

• Receive 5y5y TIIE against US swaps
• Receive 10y TILE outright
• RV; receive 5y TIIE against 5y Col IBR
• Receive Mexico TIE 18m
• Long USDMXN OT 20.00 (hedge)

Allocation Details

Market Risk and Technical Position

• Technical Position: The current technical position is not helping, and there is a growing unease with foreign positions in the Mexican fixed income market.
• Potential Sell-off: Should NAFTA break down, the plausibility of a substantial sell-off is not nil.

Contacts

Legal Disclaimer

• This document is non-independent research and may be subject to conflicts of interest.
• It is intended for Professional Clients and Eligible Counterparties as defined by MiFID.
• It is not investment research and not a solicitation for any offer to buy or sell.
• BNP Paribas may have financial interests in the mentioned entities and may engage in transactions inconsistent with the views expressed.
• The information is for discussion purposes only and is not guaranteed to be accurate or complete.
• No liability is accepted for any losses arising from reliance on this document.