As a side business I dabble in currencies, its something I always found fascinating, the downfall of the Euro as a reserve currency can be precisely dated: The day after the EU seized the cash from Cyprus based banks to restore the country...uncompensated to this day.
Now, what makes the Mexican Peso interesting are two external factors, first the Mexican peso was the proxy currency for investing in emerging markets, the correlation was over 80. Massive and liquid play. The second was the American on-shoring of manufacturing activity away from expensive and politically challenging China. Sure AMLO was an ass, but for most of the world that was investing into hard assets in Mexico it was irrelevant. The easy picking for American companies shifting manufacturing to Northern Mexico is about done. Central Mexico and Southern Mexico are the next target but present complex challenges that will require massive investments... the capital is not available domestically. So in 2025 and 2026 American companies will have to look elsewhere (Vietnam, Indonesia, Columbia etc) for their manufacturing plant locations.
The other trend was remittance where Mexican nationals working in the US would remit funds to mexico, it WAS a bigger source of foreign exchange inflow than tourism. However, the trend was not their friend, especially since Mexicans have gone home in numbers because either (a) the jobs in Mexico are available in the manufacturing sector and (b) the immigration climate in the US is unpleasant and risky. In addition and until about two years ago, Mexico revenues from oil exports were important, but years of mismanagement (pre AMLO) and a jingoistic energy policy has reduce Mexican oil production dramatically. In 2017, about 40% of the gasoline and 20% of the natural gas was from the United States, in 2023, 80% of the gasoline and 90% of the natural gas are coming from the United States.
To make matters worse AMLO's government has made massive "hidden" borrowings, PEMEX, CFE, all the airports, refinery, and trains have increased Mexico's quasi-state borrowing. Because it is not state borrowing the data is unclear, but the two airports (Tulum & Mexico City) have cost upwards of 20 billion dollars, the refinery is apparently around 15 billion and the maya train is around 20 billion. Pemex which now has the full guarantee from the Mexican Government has increased its borrowing from 180 billion to nearly 300 billion and CFE because it subsidized electricity had increased its debt by nearly 30 billion. None of these amounts are reflected int he government's borrowing, but they are all effectively guaranteed by the central government.
All the consequence of the government's action (but also the success of the North of Mexico) means that an inflection point is near for the Peso. On basic economic term the Peso should be trading around 22/26 to the US dollar (17.85 yesterday), and could easily overshoot to 30. The fiscal crisis will hit soon as the quasi state own enterprises begin to renew the loan facilities, where the price will probably triple (Mexico risk premium should be around 550 to 700 over the prime rate) based on simple economic data.
That means that since the Peso is a deep and liquid market there is a real potential for both forwards and futures at the longer end of the curve. Fascinating time.
Note: I mention this because none of my "clients" desire exposure in the Peso, so its interesting by valueless for them (or me). It's just interesting.
Note2: I have no Peso exposure in any form
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