Macro Watch: Mexico peso volatility, December sales

Peso shaky as Nafta talks kick off

The seventh round of Nafta negotiations have begun in Mexico and are set to run through March 5, with the highly contentious issues of labor and rules of origin open the session on Sunday through Tuesday.

The ongoing discussion looks likely to set off further peso volatility this week, with some experts warning investors to be prepared for the exchange rate to move erratically between 18 and 19 pesos in the days ahead on speculation based on comments emerging from the talks.

Looking at a drop over the weekend, in a note to investors Banorte-IXE said, "The peso drew back and fell 0.3% to 18.62 to the dollar on caution with the start of the seventh round for Nafta and news of the canceled meeting between [Mexico President Enrique] Peña Nieto and [US President Donald] Trump."

The bank referred to news breaking over the weekend that the two leaders had again canceled a scheduled meeting in Washington DC due to differences over official positions on the construction of a wall along the US-Mexico border.

Banorte also cited economy secretary Ildefonso Guajardo, who expects "to close at least seven additional chapters to the three already completed [in the seventh round], which would wrap up a total of 10 of 33 chapters making up the document."

The peso is looking at potentially stormy waters ahead in the coming month with the Nafta talks and the upcoming July 1 presidential election.

Retail sales slump in December

Mexico statistics agency (Inegi) reported a 2% year-on-year drop in retail sales for December, falling well short of analyst estimates, as sales of household goods dipped 2.3% month-on-month.

The consensus forecast going into the report had sales falling only 0.4%, said Banorte-IXE in a note, while the bank was somewhat more pessimistic, predicting a 0.9% year-on-year drop.

The bank noted the heavy fall in sales of household goods, stressing that the trend was even stronger in the state of Oaxaca, which has experienced significant economic impacts from last September's earthquakes. There, retail sales fell 4.6% month-on-month at a seasonally-adjusted rate, compared to the 0.5% month-on-month decline nationwide.

"We believe that the deceleration of retail sales in December was mainly due to the upward trajectory of inflation during 2017, which discouraged the consumption of merchandise, particularly of durable goods," said Banorte, adding that it expects to see a marginal slowdown in sales through 1H18.

The bank noted that while inflation has begun to fall significantly, it remains well above the central bank's target range, and consequently, this should continue to hit consumption in the country in the coming months.