Economic fundamentals back aggressive long USD/MXN for first time in years

The Mexican peso has traded sideways in a rough range around the 19.50 peso level to the dollar for the last three years as the central bank Banco de Mexico (BdeM) was forced to counteract an approximate 40 percent slaughtering of the peso caused by massive capital flight when politicians failed to deliver on key but politically and technically difficult reforms to the national oil company PEMEX during the last “sexenio” of president Enrique Pena.

The sclerotic PEMEX occupies a storied and legendary position in Mexican history as the ultimate fulfillment of the promise of the bloody and divisive Mexican Revolution, when President Lazaro Cardenas wrote it into Mexico’s massively complex constitution in the 1930s that a foreigner would never again be allowed to own or produce a single drop of Mexican oil.

World class debt

Of course, now the only thing world class that PEMEX does is issue world class amounts of debt. In every other way the company is a basket case. It is pointless to discuss the ins-and-outs of why this is – debates that created the run on the peso in the Pena administration – because our new understanding of climate change has conveniently basically taken PEMEX off the long term Mexican economic map by quietly giving the company a long-term valuation of zero.

As a journalist I will miss covering PEMEX and the petty, absurd constant corruption and thefts. It will always remain to me the quintessentially Mexican cultural economic journalistic pursuit.

Pinche pendejo

My favorite memory is getting wasted in the tony Zona Rosa neighborhood after pricing and sales of big PEMEX bond issues, which were always sold to mostly US investors at or near par. But since Mexican elites had for decades been stealing 25 percent of PEMEX production, it would be impossible for any bond issue to be worth more than 75 cents and certainly not par.

We called the US investor buying of the bonds at par the “pinche Gringo pendejo” price.

Mexican interest rates

One thing that is almost a certainty, is that the BdeM will be aggressively allowing the massive positive carry into the peso to deflate into the first half of 2020 by lowering official rates by at least 1.50 percentage points to 6%.

Mexico is in a slight recession already and BdeM has already been slowly, and in a very successful way, reducing the degree to which foreigners are participants in short-term Mexican debt markets.

New Sexenio

Mexico recently elected a new and very popular president Andrés Manuel López Obrador, who has promised to crank annual growth to 4 percent per annum, but that proposal is short on specifics.

For now, it is likely that an orderly devaluation of the peso is going to be engineered in order to try and reflate the economy.