The Mexican peso experienced a period of heightened volatility in mid-September and sunk (in real terms) to levels not seen since Mexico’s 1994-1995 Tequila Crisis. The reasons why the peso has even broken the 20.0 MXN per USD threshold in some retail outlets include low oil prices and the country’s rising public debt and widening current account deficit. Furthermore, the peso’s liquidity means that investors use it to hedge transactions elsewhere and so prospects of an interest rate increase by the Federal Reserve have also put pressure on the currency. An exacerbating factor behind the peso’s weakness is also the rising fear that the populist Republican candidate, Donald Trump, could become the next president of the U.S.
The peso has been steadily weakening recently after hitting a temporary high in mid-August, when it strengthened to nearly 18.0 MXN per USD. Since early September, the exchange rate has shown a strong correlation with Trump’s narrowing of the opinion-poll gap against his rival, Hillary Clinton. A Trump victory has the potential to derail Mexico’s political and economic stability, given the candidate’s anti-immigration and anti-NAFTA rhetoric. Market jitters have amplified as investors who are betting on Trump’s win have shortened their positions against the peso as they forecast that the MXN will suffer a major blow under this scenario.
Mexico’s financial position is however sounder than it was in 1995. The government has announced further cuts in public spending to protect the country’s credit rating and the Central Bank made a sizeable increase in the interest rate in September, which strengthened the peso. Still, uncertainty remains high and Mexican regulators have asked banks to stress test for “Trump risks”. These have so far had their largest market effect in Mexico, but weakness in the peso will persist as long as Trump holds on.Analysts surveyed by FocusEconomics for this month’s LatinFocus report expect the Mexican peso to trade at 17.64 MXN per USD at the end of 2016. For 2017, panelists expect the peso to remain virtually unchanged and close the year at 17.43 MXN per USD.