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Mexico’s central bank has embarked on an aggressive rate hikes trajectory since its currency was trodden by the Trump train and the Fed. On December 15, Mexico raised its key interest rate by 50 bps to 5.75%. Prior to this, the country hiked its benchmark rates in mid-November from 4.75–5.25%. Its December hike marked the fourth of this year.
Why Mexican Had to Hike Rates So Frequently?
First, Trump’s win in the U.S. presidential election went against the Mexican currency. Mexico is a Trump-unfriendly investment due to his plans of building a wall along the border as part of his immigration strategy and making an unwilling Mexico pay for it (read: Foreign ETFs to Win or Lose on Trump Victory).
Apart from the wall issue, restriction on outsourcing makes Mexico ETF vulnerable. Several auto companies have manufacturing hubs in that country. Speculation is rife that Trump may impose huge tariffs on imports from that country.
Apart from these, Trump has indicated in his campaign that he wants to renegotiate the North American Free Trade Agreement — or totally remove it. The agreement had tied up the U.S., Canada and Mexico for more than two decades. The deal permitted manufacturers and farmers to do seamless business.
Now, this agreement may be threatened as Trump intends to bring jobs offshored to countries like Mexico back to America. As a result, Mexico peso slumped to a record low on Trump’s victory. Also, Mexico ETF iShares MSCI Mexico Capped (EWW - Free Report) lost over 8.5% on November 9 – the day Trump was elected (read: How Deep is Trump Trouble for Mexico ETFs?).
To protect these bloodbath, Mexican central had to intervene in mid-November in the form of rate hikes. But it seems that the move was insufficient to boost the currency. Notably, peso fell about 8.5% from November 8 (the U.S. election day) to December 14, 2016.
Apart from Trump, the Fed also played role in peso’s underperformance as it hiked benchmark interest rates by 25 bps and indicated three more hikes in 2017. The yield on benchmark 10-year U.S. Treasury spiked to 2.60% on December 15, 2016.
This in turn marred the lure of relatively high-yielding emerging market securities and possibilities of gradual ceases in cheap dollar inflows and the greenback strength hurt emerging market currencies like peso even more. Mexican peso fell 1.2% on December 15 on the Fed decision. Possibly this is why Mexico had to resort to one more hike on December 15.
What Lies Ahead for Mexico ETF?
With peso falling and bets on inflation increasing, reaching as high as 4.8% for year-end 2017, the central bank may enact further hikes if there is more weakness in the peso.
Mexico’s economic growth is decent at the time of writing. The economy grew 1% sequentially in Q3 of 2016, marking the fastest expansion since Q2 of 2014. But more rate hikes may cripple the country’s growth prospects.
However, the Bank of Mexico indicated that “it sees price increases quickening temporarily in coming months and finishing 2017 within the 2 percent to 4 percent target range. Inflation will return toward the target in 2018.”
Whatever the case, the initial part of 2017 is likely to be worrisome for Mexico ETFs. Trump’s polices will play an important role in driving up or down the Mexico funds ahead. As per Tradingeconomics, Standard & Poor's and Moody's credit ratings for Mexico have a negative outlook.
In such a scenario, it is better to stay away from Mexico ETFs like EWW and Deutsche X-trackers MSCI Mexico Hedged Equity ETF . EWW currently has a Zacks ETF Rank #4 (Sell) while DBMX has a Zacks ETF Rank #3 (Hold) (see: all the Latin American Equity ETFs here).
Below is the chart showing the one-month performance of two Mexico ETFs, SPDR S&P 500 ETF (SPY - Free Report) and broader Latin America ETF Recon Capital BullMark LatAm Select Leaders ETF .
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Can Mexico ETF Rise After Rate Hikes?
Mexico’s central bank has embarked on an aggressive rate hikes trajectory since its currency was trodden by the Trump train and the Fed. On December 15, Mexico raised its key interest rate by 50 bps to 5.75%. Prior to this, the country hiked its benchmark rates in mid-November from 4.75–5.25%. Its December hike marked the fourth of this year.
Why Mexican Had to Hike Rates So Frequently?
First, Trump’s win in the U.S. presidential election went against the Mexican currency. Mexico is a Trump-unfriendly investment due to his plans of building a wall along the border as part of his immigration strategy and making an unwilling Mexico pay for it (read: Foreign ETFs to Win or Lose on Trump Victory).
Apart from the wall issue, restriction on outsourcing makes Mexico ETF vulnerable. Several auto companies have manufacturing hubs in that country. Speculation is rife that Trump may impose huge tariffs on imports from that country.
Apart from these, Trump has indicated in his campaign that he wants to renegotiate the North American Free Trade Agreement — or totally remove it. The agreement had tied up the U.S., Canada and Mexico for more than two decades. The deal permitted manufacturers and farmers to do seamless business.
Now, this agreement may be threatened as Trump intends to bring jobs offshored to countries like Mexico back to America. As a result, Mexico peso slumped to a record low on Trump’s victory. Also, Mexico ETF iShares MSCI Mexico Capped (EWW - Free Report) lost over 8.5% on November 9 – the day Trump was elected (read: How Deep is Trump Trouble for Mexico ETFs?).
To protect these bloodbath, Mexican central had to intervene in mid-November in the form of rate hikes. But it seems that the move was insufficient to boost the currency. Notably, peso fell about 8.5% from November 8 (the U.S. election day) to December 14, 2016.
Apart from Trump, the Fed also played role in peso’s underperformance as it hiked benchmark interest rates by 25 bps and indicated three more hikes in 2017. The yield on benchmark 10-year U.S. Treasury spiked to 2.60% on December 15, 2016.
This in turn marred the lure of relatively high-yielding emerging market securities and possibilities of gradual ceases in cheap dollar inflows and the greenback strength hurt emerging market currencies like peso even more. Mexican peso fell 1.2% on December 15 on the Fed decision. Possibly this is why Mexico had to resort to one more hike on December 15.
What Lies Ahead for Mexico ETF?
With peso falling and bets on inflation increasing, reaching as high as 4.8% for year-end 2017, the central bank may enact further hikes if there is more weakness in the peso.
Mexico’s economic growth is decent at the time of writing. The economy grew 1% sequentially in Q3 of 2016, marking the fastest expansion since Q2 of 2014. But more rate hikes may cripple the country’s growth prospects.
However, the Bank of Mexico indicated that “it sees price increases quickening temporarily in coming months and finishing 2017 within the 2 percent to 4 percent target range. Inflation will return toward the target in 2018.”
Whatever the case, the initial part of 2017 is likely to be worrisome for Mexico ETFs. Trump’s polices will play an important role in driving up or down the Mexico funds ahead. As per Tradingeconomics, Standard & Poor's and Moody's credit ratings for Mexico have a negative outlook.
In such a scenario, it is better to stay away from Mexico ETFs like EWW and Deutsche X-trackers MSCI Mexico Hedged Equity ETF . EWW currently has a Zacks ETF Rank #4 (Sell) while DBMX has a Zacks ETF Rank #3 (Hold) (see: all the Latin American Equity ETFs here).
Below is the chart showing the one-month performance of two Mexico ETFs, SPDR S&P 500 ETF (SPY - Free Report) and broader Latin America ETF Recon Capital BullMark LatAm Select Leaders ETF .
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>