As the odds of a Donald Trump victory lengthened last week, few will have welcomed the news as much as Mexico. The Mexican peso, which fell by 12 per cent in the first nine months of this year, has bounced back as market fears of a Trump win calmed.
“The peso has become a bellwether somewhat for the upcoming election and particularly for the fortunes of Donald Trump,” says Adam Collins of Capital Economics.
There are several reasons why this is the case. Aside from the wall the Republican candidate has said he would build to keep out illegal immigrants, Trump has pledged to pull the US out of its free trade deal with Mexico and Canada, the North American free trade agreement (Nafta).
Instead, he would impose a 35 per cent tariff on goods imported from its southern neighbour, including Ford vehicles. He would also begin taxing remittances sent back by Mexicans living in the US, which make up a large part of what is spent by consumers in Mexico.
Since Nafta was signed by Bill Clinton in 1994, the Mexican economy has become dependent on trade with the US. Its northern neighbour is now the buyer of around 80 per cent of all Mexico’s exports. A recent report by Moody’s found that Mexico is among the most exposed American economies to a US retrenchment in trade and investment ties. While Nicaragua and Honduras actually export more goods to the States as a proportion of their GDP, Mexico’s higher value exports – such as machinery and cars – are the types of goods that Trump thinks the US should be producing domestically, as a way to create jobs.
If Trump is elected, there may be little to stop him dissolving Nafta. A paper by the Peterson Institute’s Gary Hufbauer argues that Trump could withdraw from Nafta with six months’ notice.
While Trump would very likely have to invoke another statute to get tariffs as high as the 35 per cent level he has threatened, says Hufbauer, laws which are already on the statute books could get him part of the way. As for presidential rival Hillary Clinton, while she has expressed hostility to the Trans-Pacific Partnership, there has been little sign that she would terminate or seek to alter existing free trade deals, such as Nafta. For this reason, the peso has moved down against the dollar in recent months as Trump’s chances have improved.
The country’s central bank, Banxico, hiked interest rates in February, June and again last month in an attempt to buoy the flagging currency, which is one of the worst-performing of the emerging market currencies so far this year. But the peso’s problems are unlikely to end if Clinton wins on 8 November. This is partly because the low oil price has slashed returns on its biggest commodity export and a fall in its manufacturing production. But it is also because the peso has become a proxy for global risk more generally.
It is difficult to determine how much of the peso’s performance is tied to the odds of a Nafta renegotiation, or because Trump is causing volatility to markets more generally.
The value of the peso plummeted by almost four per cent on 24 June, the day after the EU referendum, despite Mexico’s relative lack of exposure to the UK. Every day, around $135bn (£110bn) worth of pesos change hands, making it the most liquid of all the emerging market currencies. Easy to buy and sell, it has become a favourite with traders looking to hedge against global risk.
This sensitivity to global events means that the peso may continue to fall whoever wins the election. The Italian referendum, difficulties at Deutsche Bank and the oil market could all be enough for investors to short the Mexican currency, Juan Carlos Rodado, director of Latin America research at Natixis North America, said last week.
At the time of writing, the peso was trading at 19.01 to the dollar. Rodado expects the peso to stand at 20 to the dollar by the end of the year.