Forex Investment and Currency Trading

In recent weeks, global economic activity prospects have deteriorated significantly, leading to sharp revisions to GDP estimates worldwide. In particular, the worsening of the crisis in the US is now unavoidably having an effect on the Mexican economy and GDP growth prospects for 2009. The effects of the US slowdown in Mexico’s economic activity have now become evident in 3Q 2008 figures and seem likely to extend deep into 2009. In coming months the crisis in the US is likely to impact the Mexican economy through three main channels: substantial lower growth for Mexico’s manufacturing exports, diminished remittances flows, and the lower revenues for the public sector. In addition to these negative impacts, credit restrictions faced by economic agents will unavoidably constrain domestic spending, leading to lower GDP growth prospects for Mexico.

The deteriorating economic outlook has led to a gradual but noticeable shift in the central bank’s balance of risks assessment which in turn reaffirms the expectation to see the beginning of a series of rate cuts in 1Q 2009.

Amid a significantly deteriorated global economic and financial environment, the central bank remained on hold at its October meeting—as expected by market consensus—leaving the overnight rate unchanged at 8.25%. Banxico’s decision to stay on hold was a result of the huge volatility experienced by financial markets and the potential for higher inflation readings in coming months due to cost increases that have already materialized and will be passed on to final prices and from higher domestic energy prices resulting from the gradual removal of the governmental fuel subsidies. The overall monetary policy decision statement suggested that the central bank will stay on hold for the remainder of 2008.

Moving to markets, after a turbulent October—marked by severe volatility currency episodes that pushed MXN up to 14.3 and a substantial spike in risk aversion leading to a significant steepening in Mexico’s local yield curve—Mexican financial markets seem to be stabilizing.

The set of measures announced at the end of last month by the Ministry of Finance and the Central Bank aimed at improving liquidity conditions in the local market and alleviate MXN short-term funding pressures while providing the federal government with more attractive financing terms have worked very well. The impact of these measures on financial markets was reflected in substantially lower long-term bond yields, a flatter yield curve, lower forward points and less negative TIIE-LIBOR swaps. Local markets will continue to be mainly driven by external developments particularly in US financial markets. Market expects USD/MXN to remain volatile and continue to trade in line with global risk aversion.