Peso’s slippery slide amid Trump triumph
Investors scrutinise wobbly currency
IN the wake of Donald Trump’s upset presidential win, no currency tumbled as far or as fast as Mexico’s peso. Forecasters say the worst may be yet to come. Citigroup strategist Dirk Willer sees the peso falling another 9% to 22/$ by December 31 after it tumbled by the most in two decades on Wednesday, according to his forecast before results came out. Barclays plc strategist Andres Jaime predicts it will be at 21.5 in the coming months.
Nomura Holdings has the gloomiest outlook, forecasting the peso will tumble 20% to 25/$ in the next six weeks.
While Trump’s conciliatory tone in his day-after speech eased the worst of investors’ concerns, helping the peso to reclaim some lost ground on Wednesday, there’s still plenty to fret about. Chief among them is whether President Trump will be as harsh as Candidate Trump when it comes to renegotiating free-trade deals, cracking down on illegal immigration and building a wall along the border with Mexico. The Latin American country sends 80% of its exports to its northern neighbour.
“Right now, I have no idea where the currency will end this year and whoever tells you they do is lying because no one knows what’s happening,” said Juan Carlos Rodado, the director of Latin America research at Natixis North America. “Trump’s first 100 days in office will be key to understanding what his rhetoric will be like.”
Investors would pay attention, he said, and any Mexico- or trade-related remark should send the peso tumbling. The peso is the worst-performing emerging-market currency this year after sinking 14%, and forecasts for further losses come even as it is undervalued by historical measures.
As of Tuesday, the real effective exchange rate — its trade-weighted value versus a basket of other major currencies, adjusted for inflation — was about 9.6% below the five-year average, according to a Barclays plc index.
In addition to the Trump battering, the currency has suffered from concern about how rising US interest rates will lure money away from Mexico, financial struggles at the state-run oil giant, the government’s growing debt burden and warnings from credit rating companies that it could get downgraded.
In the week prior to the first presidential debate, net short positions on the peso jumped to the highest in more than 20 years of data from the Washington-based Commodity Futures Trading Commission.
Bond investor Bill Gross, who runs the Janus Global Unconstrained Bond Fund, said the selloff may create buying opportunities. He recommended buying Mexican 10-year inflation-linked bonds against equivalent securities from the US. “It’s a rather significant spread if you think Mexican inflation is going to be higher than the US,” he said. “It’s just a question of when to jump in.” Data on his website shows Mexican inflation-linked bonds are the seventhbiggest holding in his fund.
“Trump’s speech overnight was conciliatory . . . that was a breather for the peso,” said Jaime, a rates and currency strategist at Barclays in New York. “The markets are giving him the benefit of the doubt.”
As bad as it was for the peso, at least one strategist had forecast it would be a whole lot worse. In the run-up to Tuesday’s vote, Grupo Financiero Banorte had said the peso could tumble 17% by the end of the first day’s trading. — Bloomberg