Peso dives on double whammy from rating agencies

Summary:

• Fitch cut Mexican rating while Moody’s lowered its outlook, both agencies cited the same factor
• No trade agreement between the US and Mexico has been agreed, talks to continue today
• Equities fared quite well in the US and a bit worse in Asia

Double whammy

Dark clouds have recently occurred over the Mexican economy. Last week, US President Donald Trump threatened to slap tariffs on its neighbor leading to a sell-off in the Mexican currency. The peso got another blow on Wednesday after two rating agencies presented their revised outlook on the Mexican economy. Fitch decided to slash its credit rating to BBB - near to junk status, while Moody’s lowered its outlook to negative from stable. The two agencies zoomed in on one factor - Pemex, the state oil company being heavily indebted. It needs to be said that Pemex’s debt increased 75% during the term of the previous president Enrique Pena Nieto. Fitch also said that recent developments regarding trade tensions with the United States also affected its view. “Growth continues to underperform, and downside risks are magnified by threats by US President Trump”, the agency wrote in its statement. In turn, Moody’s focused on Pemex as well, however, it also cited less predictable policy making adversely affecting  the economic growth prospect.

Peso dives, no US-Mexico deal reached

The USDMXN is rising almost 1% this morning following a double whammy from rating agencies. Source: xStation5

In response to these reports the Mexican peso declined immediately and it is again trading close to its remarkably important technical level. Looking at the USDMXN from the broader viewpoint one may notice that the pair failed to move below the lower boundary of the bullish channel permanently. Last week brought a jump on the back of a Trump’s threat and the move is being continued today. One can imagine that the rally could yet gather momentum once no agreement between the US and Mexico is made by Monday. On Wednesday, officials from both countries failed to produce any trade agreement to ward off Us tariffs on Mexico. US President Donald Trump said after the talks that not nearly enough progress was made so far to avert his threatened duties. US and Mexican officials are to meet again on Thursday to try to hammer out an agreement to prevent the further conflict escalation. Keep in mind that a 5% tariff rate on all Mexican imports to the US will come into effect on Monday unless Mexico vows to stem the flow of migrants to the US.

A number of Mexican people trying to enter the US illegally increased in 2018, albeit this number reached its lowest level since 1971 in 2017. Source: BBC

In the other news:

• Wall Street finished Wednesday’s trading in decent moods with SP500 and Dow Jones adding 0.8% each, and NASDAQ rising 0.6%

• Asian equities have been mixed so far, a slight increase is seen in Japan (0.2%) while Shanghai Composite is down 0.8% and Hang Seng is down 0.3%

• Australian trade data for April showed a surplus of 4.871 billion AUD, below expectations pointing to a surplus of 5 billion AUD