Moderate tones from the camp of election winner Obrador have ensured that the Peso has responded surprisingly positively to the election outcome.
The signals are that there will be continuity in key fields of policy, although slight doubts remain as to the long-term stability policy.
The Peso has scope for further revaluation, but the political picture needs to become much clearer.
In the elections, Andres Manuel Lopez Obrador won no less than 53% of the vote. And Obrador can rely on his alliance of parties holding an absolute majority in both houses of parliament. At present, pundits are particularly busy trying to pick up the slightest of comments from the Obrador camp. The future chief of staff Obrador has chosen, Romo, has said that he sees no changes to the energy sector reform. On the issue of NAFTA the designated Economics Minister Marquez has expressed the hope that the new agreement could be signed by early October. In other words, the ink would dry on the treaty before the current government is out of office. However, to date all assumptions about when agreement would actually be reached on the NAFTA issues have proven to have been overly optimistic.
The financial markets have responded surprisingly favourably to the clear outcome of the elections in Mexico. The Peso gained significant ground and the stock market has proved more bullish than in other countries. A more differentiated picture was only seen in the bond market. Long Peso bonds bucked the generally positive trend, meaning that yields in part actually climbed. This was not the case, however, as regards inflation-linked bonds, whose yields dropped. The strong performance by the Peso in the wake of the election came as a surprise to us, but bore out our essentially upbeat opinion on the currency, which from the viewpoint of a long-term valuation even now still has upside potential. However, the initial post-election euphoria is unlikely to persist and temporary setbacks seem possible. However, the northward movement last week has prompted us to slightly revise our trend forecasts for the exchange rate. With a view to monetary policy, we uphold our prediction that key rates will be lowered early next year. With the currency’s recent pronounced recovery the risk of a further hike in interest rates has clearly subsided, as the downward trend in inflation looks set to continue in the autumn