Mexican Peso Gaining Against Brazilian Real: Implications
In early March, Business Monitor Online highlighted a bullish break for the Mexican peso against the Brazilian real, arguing that the peso would see further outperformance, and since then this view has played out well. Indeed, although the realis holding to support around BRL1.9000/US$, the peso’s recent gains has brought the unit to a two-year high of MXN6.8890/BRL.
This move is also in line with our take on the two countries’ fundamentals, with the currency risks much more pronounced for Brazil than for Mexico right now. In addition, we believe that the downside risks to Brazil’s economic trajectory are pronounced, whereas we see upside risks to our above-consensus Mexican growth outlook.
The longer-term chart is particularly constructive for the peso, with the unit rapidly approaching 2010 highs against the real, at MXN6.7970/BRL, a break of which would be another bullish signal. Although we still believe that the high proportion of short-term capital in the Mexican economy will keep the peso volatile against the dollar ahead of the July 2012 general election, the technical and fundamental picture against the real remains a strong one.