Mexican Peso Continues Free Fall in Wake of Trump Win

In just ten weeks, Donald Trump’s U.S. election win has already wounded Mexico’s economy and its currency, the peso.

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Trump’s campaign promises to build a wall on the Mexican border, restrict remittances and impose punitive taxes on Mexico’s manufacturing exports have created an environment of uncertainty and triggered a sharp deterioration in the peso’s value. The peso on Thursday tumbled to another all-time low against the dollar one day after the president-elect’s first press conference pushed the currency into freefall. So far, in 2017 the peso is the worst performing currency among the world’s 16 most traded currencies.

For now, Mexico’s economy is caught in a sort of purgatory
as some investors are dumping Mexican assets and others are hesitating, deciding whether to stay or join the exodus.

Until Trump clearly defines his administration’s stance when

it comes to managing the cross-border relationship,
Mexico’s economy will continue to be stuck in a sort of limbo, experts said. For now, however, most analysts remain confident that Trump will avoid taking an overtly hostile stance with Mexico and that, in the medium term, its economy will stabilize and recover.

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Ricardo Cano, a Miami-based investment banker at Gateway

Capital Advisors, told that investors are taking a
“wait-and-see” approach. “It may be easier to see what will happen in three months, or six months,” he said.

Mexico’s central bank has tried propping up the peso’s value by intervening in the currency market. The central bank started 2017 with a major $2 billion peso purchase in an effort to boost its value, but so far it has not stopped the bleeding.

Feeling the Squeeze

The biggest concern in Mexico is that a weak peso will spur inflation as consumers pay more for imported goods.

Over the course of the last few months, the peso’s continued devaluation has hit Mexican consumers hard when it comes to imported products such as electronics, motorcycles and automobiles. Items imported from the U.S. have practically doubled their peso cost since the start of 2013. 

Although Mexico’s National Consumer Price Index, a measure
of inflation, increased by 2.7% in the third quarter of 2016, many of the everyday items people consume have increased more dramatically. For instance, prices for fruits and vegetables jumped by 8.5% between July and September. Food, beverages and tobacco jumped by 3.7%.

Inflation and expensive imports are hard to accommodate when the economy as a whole isn’t performing impressively. Right now, Mexico is dealing with a difficult mix of factors. Low oil prices hurt export revenues.

Time to Invest in the Mexican Peso?

Time to Invest in the Mexican Peso?

Nomura G10 FX Strategy global head Jens Nordvig on currency investing.

Ford’s recent decision to cancel a $1.6 billion investment in Mexico is another major blow. The fact that other car companies
are also re-evaluating their moves to Mexico following a pounding by Trump is another issue. And Trump’s criticism of Mexico and his proposed border have caused the country’s economy to sputter.

Cameron Brandt, the director of research at EPFR Global, a Cambridge, Massachusetts-based investment research company, told, “there's still a lot of uncertainty. Fund managers are cutting their exposure to Mexico.”

The Road Ahead

So far, however, many analysts continue to hold a positive outlook for the recovery of the peso and Mexico’s economy.

Mark Schaltuper, the Global Head of Country Risk at BMI Research, a New York-based advisory company, told that the peso is “extremely undervalued.”

“Negative sentiment is at extremes,” he said. “Although near-term concerns about Trump's presidency are likely to see continued volatility, we think the currency will jump back on the mildest positive news.”

Schaltuper said he is confident that unless Trump declares a full on trade war with Mexico, investment, economic activity and the peso are all going to recover.

“The currency,” he said, “will snap back.”