Here's What You Need To Know About Mexico's Election
Mexico is having its presidential elections this Sunday, July 1 and it is expected to be a controversial one. Here is a great article I found on the subject:
Mexico holds presidential and congressional elections on July 1. The polls suggest the PRI will recapture the presidency for the first time since 2000. Since 2000, the PRI has tried to reinvent itself as a reform party. It is expected expand its control of the Senate, but it may not secure a majority in the lower house.
PAN, which has controlled the presidency since 2000, is likely to suffer the steepest losses. In fact, its presidential candidate may come in third place behind the PRI and PRD candidates. PAN's Calderon barely won the presidency in 2006 with less than 1% margin.
In fairness, Calderon did implement several reforms, including increased access to health care, improved infrastructure and modest measures to improve competition. His effort to improve education was resisted by the teachers' union. He also enjoyed some successes in using the army to fight organized crime.
The PRI's Pena has based his campaign on two issues: stronger and more inclusive growth and new efforts to end the drug war. Ultimately, however, he seems to offer a more charismatic personality and soap-opera star wife that speaks to the "feel good" factor.
The key determinants of Mexico's growth are outside its borders. Despite having extensive bilateral trade agreements (among the most in the world), Mexico has not really diversified its trade. The US buys 80% of Mexico's exports. In addition, China's entry into the WTO in 2001, crushed the maquiladora industries.
The good news for Mexico, which the next president is likely to reap the benefits,is that in the 2014-2015 period, Chinese wages appear poised to rise above Mexican wages. This is an important competitive shift. There are already anecdotal reports of Chinese companies investing in Mexico to take advantage of this shift to service the US economy. Separately, as foreign banks consolidate, it is possible that it leads new opportunities for local entities in the financial sector.
Like the Mexican economy, the drivers for the peso are largely external. The peso is sensitive to the general risk environment. This is captured in the peso's correlation with the S&P 500. We looked at a 60-day rolling correlation, conducted the percentage change of the peso and the S&P 500. That correlation stands near 0.68 today. Earlier in June it had fallen to 0.60, which was the weakest correlation since early 2010. In the period ahead the correlation is likely to get tighter.
The peso has a weaker correlation to oil prices. It is currently just above 0.57. The correlation has rarely been above 0.60 over the last several years. This suggests the risk is that the correlation between the peso and oil eases in the period ahead.
Speculative positioning in the peso futures at the IMM as of last Tuesday was short. Earlier this month the short position had approached the largest since 2005, but over the past couple of weeks, about half the net short position has been covered.
Our fundamental outlook, colored by the heightened global growth concerns and the unresolved European debt crisis, warns of the risk of peso weakness in the days ahead, regardless of the electoral outcome. Initial resistance for the US dollar is seen near MXN14.00 and then MXN14.20. Dollar support is seen near MXN13.80.
There is a long transition period after the election. The new Congress takes office in September, while the President does not assume office until December. This will, arguably, give the external drivers, even more sway.