Market News

By Michael O'Boyle

(Bloomberg) -- Mexico’s peso is set to strengthen through the first half of next year as investors grow more comfortable with the new administration and volatility around the US election fades, according to UBS Group AG.

The currency should gain around 5% from current levels to 18.50 per dollar by the middle of 2025 and end the year in those levels, said Gabriela Soni, head of investment strategy at UBS Mexico. That’s stronger than the median of analyst expectations, at 19.13 per dollar, according to data compiled by Bloomberg.

“We see a window of opportunity, a better relationship between risk and reward, toward the end of this year when all the uncertainty has passed,” Soni said in an interview in Mexico City. In the short term, the currency will likely remain volatile, she added.

Mexico’s peso lost its post as the best major currency in the world after June elections brought in an unexpected landslide win for the ruling coalition, giving it a majority in congress that allows for constitutional changes. The peso tumbled around 14% as lawmakers moved forward with a plan that would replace judges with elected officials, raising fears of fewer checks and balances on the ruling Morena party. 

The currency recovered more than 2% from a nearly two-year low this month — when the measure was signed into law — ahead of the inauguration of President-elect Claudia Sheinbaum. The peso will get a lift if Sheinbaum implements a more business-friendly stance than outgoing President Andres Manuel Lopez Obrador, Soni said.

Still, analysts remain cautious of the peso, which has also been hit by the unwinding of so-called carry trades, volatility around the US election and the growing interest-rate differentials with other emerging currencies — all of which have helped dent its appeal with traders. 

Signs of Moderation

As Sheinbaum takes office on Oct. 1, investors will be watching for signs that she could moderate the judicial overhaul through secondary legislation needed to implement it. Moves to tighten up requirements to run for judicial office would be positive, Soni said. 

Investors will also watch for more details on her plans to fund national infrastructure spending to address constraints in logistics, power and water supply that could crimp the migration of more factories to Mexico in order to be closer to the US, the so-called nearshoring. 

“If a plan is sent where they are going to invest in all these issues, in order to be able to resolve the bottlenecks, then it could also be a catalyst to attract more investments to Mexico,” Soni said.

Sheinbaum will need to engineer an “opening toward the private sector” in order to attract the investment needed to fund such infrastructure plans, she said. 

The peso could also gain if Sheinbaum delivers a budget that clearly lays out how the government will cut its deficit, Soni said. Sheinbaum and Finance Minister Rogelio Ramirez de la O have said they aim to narrow the deficit to under 3.5% of gross domestic product from 5.9% this year, which is the highest since the 1980s. 

“A consolidation effort — perhaps not toward 3%, but toward 4% or 4.5% — would be well received by the market,” she added. 

Mexico Operations

UBS is expanding its private banking operations in Mexico after it shuttered its local stock brokerage in 2021 and then acquired Credit Suisse’s business in the country following UBS’s rescue of its Swiss rival in 2023.

Gustavo Galvan Duque, UBS’s country head for Mexico, said the bank is “advancing well” in combining the two businesses, which allowed it to grow wealth management assets and clients in a way that otherwise would have taken it seven or eight years.

--With assistance from Andrea Navarro and Alex Vasquez.