There were two very different sides for Mexico’s currency in 2017.
The Mexican currency peso first rebounded from the lows that it had sunk into following the Trump effect after his election as the U.S. President and the apparent hostilities against Mexico, the currency again slumped to some degree which did not however erase the annual gains that the currency had managed to make for the first time in five years. And 2018 eight could also be volatile year for the currency given the impending Presidential elections in the country and the ending of the Nafta talks.
Ever since Donald Trump took office as the U.S. president and his constant rhetoric against the Nafta agreement that ensures $1 trillion mutual trade between the U.S., Mexico and Canada, the agreement has hanged in balance. And this uncertainty has weighed down on the peso. There are ongoing talks about renegotiation of the deal between the three countries and is scheduled to end next year. an inconclusive end could mean the U.S. pulling out of the deal.
And in July next year, Mexico is to witness its biggest political event – the presidential elections. The elections feature leftist candidate Andres Manuel Lopez Obrador who is expected to upset the ruling and scandal ridden PRI party.
“A lot of the peso’s gain was a correction of the over-pessimism in the past,” said Danny Fang, an analyst at BBVA in New York. “For the first quarter of 2018, we can expect the MXN to remain sensitive to new rounds of political noise, with the electoral process and Nafta negotiations being the main drivers.”
The peso had sunk quite low during the election to the U.S. presidentship and because of the Trump effect but later rose significantly not make the first annual gains since 2012.
Trump had threatened to dishonor the Nafta pact calling it one that disadvantaged the U.S., had repeatedly talked about repatriation of Mexicans from the U.S. and vowed to build a wall with the Mexican border with Mexican money during the election campaign. And after his win in the election in November of 2016, there was a 14 percent fall in the peso soon after.
But soon after it got over the Trump mania and managed to gain significantly and was even noted as one of the best performing currencies among emerging market currencies during the first quarter of the year. And despite a second fall in the year during the mid-year period, the currency still managed to score a 5.4 percent annual gain. It emerged as the second best performing currency in Latin America, surpassed only by the 8.9 percent annual gains made by the Chilean peso. The peso can be pushed higher next year by an increasingly hawkish central bank.
However, investors in the currency are still worried. Due to hedging by investors against currency risks, a six-year high is being noted in the difference between the local and hard-currency bonds in terms of yield spreads. And as t he political environment gets charged up – pressurizing the currency further next year, investors are awaiting to see whether it can make a repeat of the feta that peso had made earlier in the first quarter this year.
(Adapted from Bloomberg.com)