It's Goldman Versus Morgan Stanley When It Comes to Mexico's Peso

(Bloomberg) -- Two of Wall Street’s most storied banks, Goldman Sachs and Morgan Stanley, are at odds over the direction of the Mexican peso, the world’s best-performing currency in July.

Goldman Sachs says there’s still room for gains, even after the peso’s 7 percent rally. Morgan Stanley begs to differ, saying the currency is close to a selling point. Either way, the future of the North American Free Trade Agreement is key.

"Even with the move, the currency still screens as undervalued," Goldman Sachs strategists Zach Pandl, Kamakshya Trivedi and Caesar Maasry wrote in a note today. The reasoning: Moderating inflation under a vigilant central bank, tempered rhetoric from incoming President Andres Manuel Lopez Obrador and of course progress on Nafta talks. While the peso’s path could be gradual and subject to volatility, Goldman Sachs pegs it at 18.5 to the dollar in November and 17.75 next August.

Morgan Stanley, however, says it’s time to short the Mexican peso by betting on the Colombian peso or, for investors willing to shoulder cross-regional risks, the Indian rupee.

"Our model is very close to flagging a sell signal on the currency," London-based Morgan Stanley strategists including James Lord and Min Dai wrote in a note, also today. "Good news on Nafta is broadly in the price and we think that the risks are tilted towards underperformance now."

The Mexican peso has rallied 13 percent since reaching a 15-month low on June 14, two weeks before the vote. Lopez Obrador, popularly known as AMLO, swept to victory and proceeded to project an unexpectedly pro-markets tone. Spreads on Mexican five-year credit default swaps have narrowed by 35 basis points since then, while the benchmark stock index rose 4.5 percent.

Mexico Economy Minister Ildefonso Guajardo told reporters in Mexico City today that his team will be back in Washington D.C. at the middle of this week to continue Nafta talks with U.S. counterparts.

To contact the reporter on this story: Giulia Morpurgo in New York at gmorpurgo1@bloomberg.net

To contact the editors responsible for this story: Rita Nazareth at rnazareth@bloomberg.net, Alec D.B. McCabe, Philip Sanders

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