The Mexican peso is currently experiencing a sell-off, but ING economists believe that Mexico’s “new nationalization” initiative should not have a negative impact on the currency. The recent sell-off appears to be driven by a corporate finance deal announced earlier this week, in which the Mexican government is purchasing 75% of the Mexican gas and wind facilities from Spain’s Iberdola for nearly $6 billion. Mexico’s president, Andres Manuel Lopez Obrador (AMLO), has referred to this move as a “new nationalization.”
While the term “nationalization” may be concerning for some investors, ING economists argue that this deal should not be viewed negatively for Mexico’s ability to attract foreign direct investment (FDI) inflows, particularly from companies considering nearshoring operations. They note that there will likely be strong demand for the peso should the USD/MXN exchange rate correct to the 18.50-19.00 range.
This optimism comes amid expectations of a broader economic recovery for Mexico as pandemic-related restrictions ease, global demand picks up, and key industries such as automotive and electronics production resume growth. Additionally, the Biden administration’s focus on strengthening its relationships with regional partners, as well as imposing stricter labor standards and environmental regulations on trade partners, could further support Mexico’s attractiveness as a nearshoring destination.
As such, ING economists forecast the potential for USD/MXN to trade as low as 17.50 and even 17.00 later this year. This would represent a significant appreciation for the peso from its current levels and suggests that the recent sell-off may be a temporary phenomenon.
Future peso developments will likely depend on various factors, including global and regional economic trends, monetary policy decisions by the U.S. Federal Reserve and the Bank of Mexico, and ongoing adjustments to Mexico’s policy framework under AMLO’s administration. It’s also important to consider potential risks to this outlook, such as renewed concerns about the future trajectory of the pandemic or a resurgence of global trade tensions.
Nonetheless, the current sell-off in the peso and concerns about “new nationalization” may provide an opportunity for investors to reposition their currency exposure in anticipation of future peso appreciation. As noted by ING, this would be particularly attractive to those looking to benefit from the expected recovery in the Mexican economy and the country’s potential as a nearshoring destination in the coming years.
To conclude, while the peso sell-off and Mexico’s “new nationalization” initiative may be causing unease among some investors, it’s essential to consider the broader context and potential long-term effects. The recent deal with Iberdola should not be viewed as a negative for Mexico’s ability to attract FDI or its attractiveness as a nearshoring hot spot for multinational corporations. Instead, investors should focus on the expected economic recovery and long-term fundamentals driving the peso’s potential appreciation in the future.
Therefore, rather than being overly pessimistic about the recent sell-off and seemingly unfavorable news surrounding the Mexican peso, investors should use the unique opportunity to strategically position themselves for a potential currency reversal. By doing so, investors can gain exposure to a currency that is poised to appreciate as Mexico’s economy recovers from the effects of the pandemic and benefits from increased nearshoring activity by multinational corporations seeking alternative production locations.
Ultimately, wise investors should recognize that this “new nationalization” by the Mexican government does not signify a decline in Mexico’s attractiveness as an investment destination, nor will it have lasting negative effects on the Mexican peso. Instead, it represents a tactical move to secure valuable assets as Mexico continues on its path towards economic diversification and growth. By interpreting these events within their broader context, investors can make more informed decisions about how to allocate their capital and benefit from potential opportunities in the Mexican peso and the country’s emerging nearshoring landscape.
