It is looking increasingly like the US Presidential election is over but the crying, and most likely the fence between the US and Mexico will not become a wall. The third and final debate was last night and it does not seem to have stopped the hemorrhaging of Trump's support. The peso had sold off through most of September as the polls drew close. Is it a buy now?
No, it is not. First, it is important to recognize that there are other drivers for the second most actively traded emerging market currency (second to the Chinese yuan) besides US politics. Macroeconomic factors, domestic political forces, oil prices, and the general risk appetite have all be part of the peso story.
Second, it needs to be appreciated that the odds of a Trump victory has steadily fallen since the first debate and before the tapes, which have been in the public space, drew attention. The market's powerful anticipatory or discounting mechanism needs to be respected. Since September 26, the peso has been the strongest currency in the world. It has risen 7% against the dollar. The next best has been the Brazilian real, which appreciated less than half of what the peso gained.
Third, from a technical perspective, the dollar has approached a key trendline drawn off the April lows. This is shown in this Great Graphic from Bloomberg. It is found near MXN18.40 today and the low has been near MXN18.4560. Technical indicators warn that if the dollar's low is not yet in place, it has been approached. Corrective retracements of the dollar's drop since September 26, suggests potential toward MXN19.05, and then possibly back into the MXN19.20-MXN19.40 area.
Fourth, the fundamentals are of questionable support for the peso. Increasingly the investors have come around to the view that the Fed will indeed hike rates in December. Mexico has raised rates to defend the currency and head off the potential inflationary impact from the depreciation, but such action is aggravating the economic slowdown.
Fiscal policy has also tighten and is projected to tighten further next year. The draft budget anticipates a fiscal drag of around 1.2% of GDP. Nearly half comes from the Pemex capital budget, which bodes ill for new investment. At the same time, the current account is deteriorating, and public and private debt ratios are increasing.
Opinions expressed are solely of the author’s, based on current market conditions, and are subject to change without notice. These opinions are not intended to predict or guarantee the future performance of any currencies or markets. This material is for informational purposes only and should not be construed as research or as investment, legal or tax advice, nor should it be considered information sufficient upon which to base an investment decision. Further, this communication should not be deemed as a recommendation to invest or not to invest in any country or to undertake any specific position or transaction in any currency. There are risks associated with foreign currency investing, including but not limited to the use of leverage, which may accelerate the velocity of potential losses. Foreign currencies are subject to rapid price fluctuations due to adverse political, social and economic developments. These risks are greater for currencies in emerging markets than for those in more developed countries. Foreign currency transactions may not be suitable for all investors, depending on their financial sophistication and investment objectives. You should seek the services of an appropriate professional in connection with such matters. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete in its accuracy and cannot be guaranteed.
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