Forex Investment and Currency Trading

There are two main upside risks to the MXN. First, thus far, the US downturn has neither affected manufacturing exports nor growth in Mexico. This is because the auto sector has remained robust, while Mexico is becoming a key supplier of intermediate manufacturing inputs for booming US exports. If this trend continues, then the US export story would mitigate the contractionary effects of the US recession in Mexico. This is because Banxico would raise interest rates if supply price shocks in the 1Q2008 contaminate expected inflation and price formation. In fact, since the introduction of the new fiscal reform (which includes the introduction of a new income tax, the IETU, and higher fuel taxes) we have witnessed a spiral of price increases, spreading to food prices and other basic staples. therefore, some believe that Banxico may have to tighten to defuse the risk of generalized price mark ups, including that of wages. If Banxico tightened, while the FED will likely to continue to ease, then there is a possibility that the MXN would appreciate.

The main downside risk for the MXN is that the hits to manufacturing exports and growth in Mexico are much stronger than what is currently forecasting, leading to a wider BoP deficit and a weaker MXN.