Inflation in Mexico has been trending down since 2017 when it was running at about 6.5%, the outlook for 2018 appears to be around 4.9%. This is odd, in that a cooling off in inflation usually is followed by lower bond yields. The 10-Year Government Bond in Mexico is currently yielding 8.17%, this is almost as high as what we were seeing in 2009. Between 2013 and 2015 the rate was between 4.5% and 6.25% with the low in January of 2013. 2013 was the year that the Mexican stock market hit its most recent high. Rates have been trending higher since January of 2016.

The 10-Year bond has almost doubled in yield since the low in 2013. Rates began to climb modestly for the next few years then took off with the concern about U.S. policy shifts that were likely to take place under a Donald Trump presidency. This fueled a plunge in the value of the peso and a surge in inflation, though that inflation appears to be moderating. The financial markets do not like uncertainty, regardless of fundamentals.

The Mexican stock market (I’m using the Mexico Fund Inc) has been mired in a trading range since declining from its peak in 2013. The market has been building a base for three years and a break to the upside would be significant. Any move above this trading range would bode well for the markets in Mexico. I would not be a buyer in the Mexican stock market until it has broken to the upside of the trading range.

Most of us have been focused on trade negotiations.  AMLO (the President-elect) has benefited by having this trade agreement approved before he takes office. The trade deal recently reached with the U.S. and Canada will allow AMLO to focus on the domestic priorities of reducing poverty and drug violence in Mexico. There is no question that Mexico has benefited from America’s strong economy. I guess the question becomes whether they can flourish without the U.S. There will be a time when the U.S. will have to pay the price for the policies that have been put in place by the last and current administration. Heavy debt and excessive military spending come to mind.

When I arrived in San Miguel de Allende in Mexico the exchange rate was 12.5 pesos to the U.S. dollar. The peso rose to about 13-13.5 pesos to the U.S. dollar for the next couple of years. Then in 2015, the peso just started falling apart. After Donald Trump’s election, the peso spiked to 22 pesos to the U.S. dollar.  The curious thing is that the peso is really just back to where it was before Trump’s election. It has bounced off the 17.5, 18 and 18.5 level over the last year. We are close to breaking the short-term downtrend line and if that happens we could be seeing more weakness in the peso. Only time will tell.

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