Mexican peso dips on Trump’s threats

Mexico’s peso fell and emerging market stocks lost some traction yesterday, after US president Donald Trump revived threats to build a border wall and terminate the Nafta trade treaty.

Suggesting that scrapping Nafta might jumpstart current renegotiations, Mr Trump said at a political rally: “I personally don’t think you can make a deal without a termination.”

It sent the peso, which has rallied 17 per cent this year on hopes that Mr Trump’s threats will not materialise, down 0.6 per cent against the dollar, even as the greenback itself fell against the forex pairs.

Turkey’s lira, Russia rouble and South Africa’s rand dropped between 0.1 and 0.3 per cent too.

MSCI’s widely-tracked EM stocks index lost momentum too, though a 0.4 per cent rise in Indonesia after an interest rate cut and a 6-year overnight high for Brazilian shares kept the index just about positive.

“For the peso, the market had largely priced out any risk of trade protectionism, which is why you have seen a very strong rally (this year),” said UniCredit strategist Kiran Kowshik.

“But with Trump up against the wall, finding it tough to do anything on the likes of tax reform, he is looking for other things to do. So you’ve seen sanctions against companies in Russia, and now there is more hardline rhetoric on the trade side.” “So this could see the peso come under a bit of pressure as the market assumed there would be no trade frictions.”

Traders were also waiting for today’s start of the Jackson Hole conference of top central bankers, which includes Fed head Janet Yellen and ECB president Mario Draghi and could provide clues on where global interest rates are heading.

Emerging market stocks, bonds and currencies have been many of this year’s top global performers as borrowing costs and the dollar have stayed low, so any sign a change is on the horizon could unnerve investors. For now, though, things look rosy.

The average yield on EM local currency denominated debt was at a more than 2-1/2 year low of just above 6 per cent yesterday. EM stocks are up almost 25 per cent for the year and government bonds have made almost 8 per cent.