No Barriers Have Been Able To Arrest the Rise of the Mexican Peso 1

Leaping over the wall

We still don’t know whether there will be a border wall between the US and Mexico, but for now, the Mexican peso has certainly leaped over the hypothetical barrier between the US and Mexico that has been in place since Donald Trump’s election campaign.

The peso, which was the worst hit emerging market currency in the aftermath of Donald Trump’s victory on November 8, has staged a remarkable comeback in 2017. Against the US dollar (UUP), the peso has strengthened to a level not seen since the US election last November. In the graph below, the decline represents a strengthening peso against the greenback.

Reasons for the rise

Part of the reason for its rise can be attributed to the Federal Reserve’s projection for an easy pace of rate hikes, which has benefitted emerging market assets in general. Given the strong state of the US economy, there were worries that the Fed may accelerate the pace of rate hikes, but it has since signaled that it would remain on the original path set out for this year.

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Another major factor fueling the rise of the Mexican peso is a softer tone adopted by US officials as far as trade ties with Mexico are concerned. Soothing comments from Trump’s advisor Peter Navarro and Commerce Secretary Wilbur Ross for better engagement with Mexico and coordination between the three NAFTA signatories has been immensely beneficial to the peso.

Views on the peso’s future

Bloomberg reported that Citigroup strategists, led by Dirk Willer feel that the sizable inflows into the Mexican peso are “clearly not sustainable.” The team feels that unless leveraged investors buy the peso “in a meaningful way,” the currency looks headed for a fall.

BBVA has revised its year-end forecast for the peso to 20.50 from 21.50 per dollar, as reported by Bloomberg, as the bank feels that NAFTA risk has declined. In the short-term, BBVA expects the peso to remain strong because the country’s central bank is expected to hike interest rates in March.

UBS feels that the peso is still attractive due to the aforementioned softer stance of the US on trade relations with Mexico. Bloomberg reported that the bank has revised its forecast for the peso to 19, 18.5 and 18 for three, six and 12 months, respectively, from 21.5, 19.5 and 19 earlier.

Hence, it seems that the general perception about the Mexican peso is that it can get stronger against the dollar. The dollar itself has been weakening after the policy announcement by the Federal Reserve on March 15.

After looking at Mexican equities in the first article and the peso in this one, let’s look at whether Mexican assets are still attractive in the next article.

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