The Mexican peso and the Trump trade

Posted on September 19, 2016

U.S. Republican presidential nominee Donald Trump and Mexico's President Enrique Pena Nieto arrive for a press conference at the Los Pinos residence in Mexico City, Mexico, August 31, 2016. REUTERS/Henry Romero©Reuters

Forget the opinion polls. The Mexican peso has become a better barometer of Donald Trump’s US election chances.

The New York magnate’s rebounding prospects have been mirrored by the sharp slump in the currency of the country the Republican says exports rapists and criminals, siphons off US jobs and will pay for a border wall to keep immigrants out.

    On Friday — Mexico’s independence holiday — the peso slumped to its lowest-ever level against the US dollar, hitting 19.77, before regaining some ground. In London mid-session trade on Monday, it was trading around 19.60 to the dollar.

    Mr Trump’s surge in opinion polls to draw virtually neck-and-neck with Hillary Clinton, his Democratic rival, and even to overtake her in some key states, is not the only thing hurting the peso. But as the head of emerging markets at one New York-based bank put it: “If you believe Hillary will win, you should be buying the hell out of Mexican assets.”

    Alonso Cervera at Credit Suisse in Mexico City traces the link between the peso and the US election to early May, when Mr Trump won the Indiana primary and his rival Ted Cruz dropped out of the race. “The peso sold off and all the other emerging market currencies were unchanged,” he said.

    The peso is the world’s eighth most traded currency and is widely used as a hedge to be sold in turbulent times against other emerging market positions. It has been the worst EM performer this year, losing nearly 12 per cent of its value, says Benito Berber at Nomura. Uncertainty over the timing of the next US interest rate hike, jitters over oil prices as producers prepare to pump more into already glutted markets and a stronger dollar against other EM currencies are also weighing.

    “It’s a bit of a perfect storm, in a bad way,” said Mike Moran, head of economic research for the US and Latin America at Standard Chartered in New York. “The Mexican peso is really at the bottom of the bucket.”

    Indeed, it is now within striking distance of the psychological 20-to-the-dollar level — a once unthinkable number that has profound sticker shock for Mexicans, even if the peso’s slide in recent months has, for once, not passed through to inflation.

    “In many ways, a weak peso is a good thing for the Mexican economy that is very open,” says Jorge Mariscal, chief EM investment officer at UBS Wealth Management. One-third of GDP comes from exports, which are more competitive with a weak peso, he noted. Both dollar oil revenues, and remittances from Mexicans abroad — which totalled $25bn last year — also go a lot further when the peso is weak.

    While it may be tempting to ascribe the peso’s slide entirely to Mr Trump, the real risk is of either a Trump, or even a Clinton, presidency implementing protectionist measures harmful to Mexico, Mr Mariscal says. Mexico sends more than 80 per cent of its exports to the US. Enrique Peña Nieto, Mexico’s president, has seen a fall in his own ratings to a historic low, making it harder for him to weather storms.

    Mexico, which has already been put on notice by rating agencies that rising debt levels are putting it at risk of a downgrade, faces both monetary and fiscal policy challenges in the choppy times ahead.

    If you believe Hillary will win, you should be buying the hell out of Mexican assets

    – New York-based emerging markets analyst

    The bank has international reserves of $176bn, and a renewed, expanded credit line from the IMF, but is unlikely to want to blow through that war chest in case it needs to intervene to cushion sharp forex lurches in the event of a Trump win.

    Fiscally, it is also a balancing act for Mexico’s underperforming economy. The 2017 austerity budget is aiming for its first primary surplus in eight years and targets a rate of 18.2 to the dollar next year. A far weaker peso might risk blowing a hole in calculations, especially because of the higher cost of servicing the 30 per cent of debt denominated in US dollars, Mr Mariscal said.

    But the finance ministry has calculated that if the foreign exchange rate is one peso weaker than budgeted — 19.2 compared with 18.2, on average, next year — the benefit to the fiscal accounts would be 0.1 per cent of GDP, Mr Cervera noted.

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