Mexico: Containing the fallout – Nomura

Research Team at Nomura, suggests that with president-elect Trump now confirmed, tail risks are quickly materializing for MXN-denominated assets.

Key Quotes

“FX markets are quickly reversing gains in the early morning trading and are now converging to new and early “unstable” equilibriums. Overshooting is expected to continue in the next days, particularly for spot MXN and implied volatility. FX-wise, we expect initial fallout in MXN to unchartered territory. Subsequent moves should be a function of the new administration’s plans towards Mexico.”

“The first 100 days of Trump’s presidency will be crucial in terms of gauging what type of policy could be implemented. In our opinion, we consider this a scenario in which the Mexican authorities should hope for the best, but seriously prepare for the worst outcome. Anti-trade and anti-remittance policies, if implemented, would mean a new equilibrium likely to be characterized by a weaker MXN path, significantly higher policy rates (perhaps above South Africa’s, which has averaged 7.0% over the last decade, compared to Mexico’s 5.0%), a much more prudent fiscal policy and much lower growth.”