We think there is space for the “Fed-pause-relief” to continue for a while, thus favoring carry trades in EM.
We are maintaining our constructive view on Mexican local assets on the back of high real rates and robust fundamentals. On the activity front, domestic demand data suggest that the strong momentum of the beginning of the year has extended into 2Q and that growth has shifted from external to domestic sources. Our economics team has revised up its growth outlook and currently stands well above consensus at 2.5%y/y for 2023 (vs 1.6%y/y median of Banxico survey).
We will, however, keep a close eye on incoming data to re-as- sess our views regarding the Fed cycle, the magnitude of the global deceleration ahead, and its implications for the Mexican economy.
Risks to keep in mind are the somewhat rich valuations and signals of more crowded positioning, which increase the vulnera- bility to an unexpected spike in risk aversion. Absent a major crack, however, robust fundamentals and appealing carry should still serve as tailwinds to the currency. We remain OW MXN.
- J.P. Morgan FX Strategy
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