Lower Economic Activity For Mexico.

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Breathing space with higher oil price
Last week, January economic activity data have been released lower than expectations at 2.33% m/m, and also lower than in December when it came in 2.56% m/m. It confirms the underlying difficulties of the Mexican economy which is highly dependent on the United States and oil exports. The collapse of the black commodity is still having an important impact on the country. Yet, current rebound is a good news for a country that still lies on the shade of its big neighbour.
In the Fed’s path
Mexico’s curse is that its central bank needs to carefully follow the Fed’s monetary policy in order to avoid any capital outflow that would result from a narrowing rate differential. In 2015, the Mexican central bank changed the dates of its interest-rate decision based on the FOMC’s meeting dates in order to be more reactive to any change in US monetary policy. In other words, it wants to ensure it can respond to an increase in US borrowing costs.
Oil price is still too low
It is clear that in the event of a rate hike, Mexico’s economy will be at stake as the country continues to pay the price for its lack of investments in its industry sector, in particular its oil industry. In addition, extracting the Mexican oil is expensive and the breakeven price is still above the current market price. On top of that, with an out of date infrastructure the country simply does not have a fighting chance to compete in the oil market. Nevertheless, we believe that the health of the US domestic economy is overstated and believe that no further rate hike will happen this year. The dovish stance is clearly retreating and unfortunately for Mexico, we should therefore see additional weakening in the USDMXN. As a result, the Mexican GDP is set to suffer.
Regards All.
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