- Mexican Peso is poised to lift-off on a NAFTA deal.
- Real is bleeding from increasing political uncertainty.
- MXN/BRL is an opportunity waiting to be seized.
ยฉ kasto, Adobe Stock
The Mexican-Peso-to-Brazilian-Real rate is subject to a perfect storm of conditions that could see the exchange rate rip higher, according to the CEO of Exante Data, who argued Thursday that Latin America may be the new El Dorado for traders seeking volatility.
"Trading Mexico out-performance versus Brazil and other emerging market currencies looks attractive," says Jens Nordvig, Founder and CEO of Exante Data in New York.
The Peso is primed to spike higher as a NAFTA deal is increasingly probable and imminent, according to a Politico report, which would end nearly two years of uncertainty for the currency.
On the other hand, the Real is in danger of further sharper declines given the stake in the nation's looming presidential election. The most popular candidate, Luiz Inรกcio Lula da Silva, cannot legally run because he is in jail and the next most popular is a "far-right" nationalist.
"The uncertainty comes from the fact that we have a popular person who is probably not going to be able to run. Then you have to go down the candidate list and see who is second in line and that really creates incredible uncertainty," says Nordvig. "The traditional parties do not have a Lula. So then you go to extreme parties. There is a breakdown for support for the centrist parties. it is a reflection of what is going on globally."
Reports now suggest Lula will attempt a last-minute 'handover' to his running mate Fernando Haddad, but there are fears Haddad will not be able to retain the support of Lula's voters as he himself scored only 4.0% in recent opinion polls.
Reuters reported this week that just 31% percent of poll respondents said they would definitely vote for Lulaโs handpicked successor if Lula is barred from running, while another 18 percent said โperhapsโ they would vote for such a candidate.
It is the next most popular candidate, the right-wing Jair Bolsonaro, who is potentially of more concern to markets. Fears are that his unconventional views, such as relaxing firearm laws to combat crime, might impact negatively on trade and the economy.
Bolsonaro scored 22% of the vote in polls when Lula was taken out of the equation, making him the next most popular candidate. In many ways it could be argued the MXN/BRL upside trade has already begun since both currencies are already moving in the right directions.
Above: MXN/BRL rate shown at daily intervals.
The Peso has already formed something of a 'V'-shaped recovery against the Dollar since its June lows, and the Real remains locked in its 2018 downtrend against the greenback.
Above: MXN/USD rate shown at daily intervals.
"I think if there is real progress in these NAFTA negotiations, MXN is still a relatively cheap currency, it has moved quite a fair bit in the last few weeks but it could have further to move," Nordvig told Bloomberg TV.
Another interesting trade along the same lines as MXN/BRL might be the Peso versus the Pound, which is also vulnerable political risks. However, GBP/MXN has already lost considerable ground since the peso's June low.
Above: Pound-to-Mexican-Peso rate shown at daily intervals.
The pair is in a concerted downtrend which is more likely to extend than reverse, however, with analysts saying that 'a lot of bad news' has already been absorbed into Sterling there may be limited upside when MXN/GBP is compared with MXN/BRL.
Politico reported a 'handshake' North American Free Trade Agreement (NAFTA) deal between the US and Mexico could be announced as soon as Thursday, August 23.
President Donald Trump hinted that a new deal was imminent in a tweet on Tuesday night. However, this was contradicted by the Office of the U.S. Trade Representative, which said no deal had been reached. The latest official comment stopped short of confirming a forthcoming 'handshake' agreement.
"Iโm not going to get ahead of any potential announcement. For decades, NAFTA has harmed American workers and cost the U.S. billions of dollars. Weโre focused on making sure we deal with and address those problems, and weโll let you know when we have an announcement," says Sarah Huckabee Sanders, White House Press Secretary, late on Wednesday.
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