Mexican peso feels the pressure as Trump’s inauguration looms

The Mexican peso is under pressure as Donald Trump’s official duties at the White House loom.

“It seems like the Mexican peso will remain under pressure unless or until the irreducible uncertainty surrounding the economic and political outlook in Mexico falls,” said Greg McKenna, chief market strategist at FX and CFD provider AxiTrader.

Trump has been targeting US businesses who were shifting production to the United States southern neighbour. In a recent interview, he said: “I would tell BMW that if you are building a factory in Mexico and plan to sell cars to the USA, without a 35% tax, then you can forget that”. 

“So it's no surprise that the Mexican peso is under pressure and continuing to make record lows against the US dollar,” McKenna said adding that, “The USDMXN is almost 4 big figures above the post-election low of 18.1475 the past few days.

But the big question for traders is where the circuit breaker for a halt to the Mexican selling might come from.  

Janet Yellen's speech in California certainly wasn't that circuit breaker.

By focusing on the fact that the US economy was "close" to full employment and rates are likely to rise for a number of years, Yellen highlighted that the US dollar is not only the place to be in developed markets but globally.

That's important for the USDMXN rate because cash rates and economic growth drives bond spreads which are an important driver of many currency pairs.

And with news reports saying that "Mexico's economy is set to grow at the slowest pace in four years in 2017, " the chances of traders repricing this spread anytime soon seems remote. 

According to a recent Reuters poll: "Mexico's economy is expected to grow 1.7 percent in 2017, according to the median of 23 forecasts, down from 2.3 percent in an October poll and after an estimated expansion of 2.0 percent in 2016.”

Naturall, there is an element of the market's assessment of Mexican credit in the spread which has widened as Mexican 10 year bonds have risen in yield.

And of course, Banxico and its counterparts across the region can raise rates to try to counter the weakness in their currencies.

Donald Trump's rhetoric about building a wall along the US-Mexican border and sending the bill to the Mexican government might have sounded hyperbolic during the election campaign.

But it has become clear in recent weeks that he is serious in targeting the two main villains in his narrative of what ails the US economy. 

The antipathy toward both these nations has been in evidence from Mr trump himself as a candidate and then as president-elect. Equally, his nominees for various cabinet posts have doubled down on China and Mexico in their congressional confirmation hearings. 

Most recently it was NAFTA, and specifically Mexico, that was called out by Trump's commerce secretary nominee Wilbur Ross.

Ross said "NAFTA is logically is the first thing for us to deal with," adding "we ought to solidify relationships in the best way we can in our territory before we go off to other jurisdictions."

So, while Ross also had a pop at China as the "most protectionist" country among large economies, perhaps China can wait for now while the administration deals with Mexico.   

Ross singled out NAFTA and in doing so reinforced comments made by Donald Trump in an interview earlier where he specifically warned German carmaker BMW about constructing cars in Mexico.