After a pretty quiet week on the economic front in Mexico, time to get ready for macro data to start picking up. We’ll be turning our attention to the Trade Balance, which is normally important for any currency. Given the trade situation between Mexico and it’s largest partner, the US, it’s extra important.
The really important data coming up in the next week are the GDP figures for Q2. This means that analysts are pouring over any data to give them clues as to what to expect. Mexico is flirting with a technical recession with last year’s fourth quarter coming in flat and the quarter after that negative. We could expect substantial volatility in the peso, even without the surprise of trade-related tweets from President Trump.
What We are Looking For
There are several bits of data all released at once. However, we’ll be focusing on the trade balances since those are the ones most likely to move the market. Usually, attention is focused on the seasonally adjusted number, but both can influence the exchange rate. This is especially true if they come in far from expectations. Often it’s the components of the trade balance that have more impact than the simple balance.
The consensus of expectations is for the trade balance to slip back into negative at -$746M. This is a significant drop from the $984M surplus last month. As for the non-seasonally adjusted number, expectations are also for it to return to negative at -$1.03B. This would be the mirror image of last month’s $1.03B surplus.
Mexico has been recording a trade surplus for about four months now. This isn’t exactly a usual situation for the country. The trade balance tends to bounce back and forth over the 0 line, typically spending more time in negative territory. A long-term trade surplus is rare. This is one of the factors leading to presume a trade deficit is in the cards really soon.
The recent trade surplus has been supported by increasing exports in manufactured goods, especially automobiles to the US. During this period the exchange rate has remained largely stable, despite high inflation. What has been happening, though, is imports have been shrinking when excluding petroleum products. The positive trade balance is being attributed more to a drop in internal demand than improving trade conditions.
A couple of days ago we had a survey of economists by Citibanamex. Expectations were for economic growth of 1.2% for this year. Inflation was projected to stay above the central bank’s target at 3.7% on average for this year. Despite the inflation outlook, expectations remain for the next action to come out of the Banxico will be a rate cut.
In the central bank’s minutes from the last meeting, there was a consensus that the economy was slowing faster than expected (a position that was contradicted by President Lopez Obrador a couple of days later), and that would lead to lower inflation. While in general a weaker peso might be expected to support exports and widen the trade balance, there are political considerations. The USMCA deal is yet to be ratified, and there is also uncertainty about how the new administration will address the economy.
Unless we have a major change in the data trajectory over the next couple of weeks, the bulls don’t seem to have much to work with in the medium term.