Two steps forward, one step back — that’s been the story of the Mexican peso over the past three weeks.

After coming tantalisingly close to completely erasing its post-Trump election losses on Tuesday, the peso received a walloping on Wednesday – dropping by as much as 1.6 per cent to a 2-week low of 18.88 per dollar.

The decline is the currency’s biggest one-day drop in over three months and puts something of a damper on the peso’s stunning run.

From a record low of 22 per dollar in January, the peso has strengthened more than 16 per cent to hit a post-election high of 18.45 on Tuesday, putting the currency within striking distance of the 18.32 level it closed at on November 8th, before news of Donald Trump’s presidential victory triggered a collapse.

Carlos Serrano, chief economist at BBVA Bancomer, attributes Wednesday’s sharp pull back to a number of factors – including the broader US dollar rally and the drop in oil prices, which is pressuring currencies of oil producing nations.

Investors have turned increasingly bullish towards Mexican assets in recent months – with the country’s benchmark IPC stock index setting repeated new highs this month – as the economic and migration crisis that many feared a Trump presidency would trigger, failed to come to pass so far.

While the Mexican economy has slowed, it is proving more resilient than the market was expecting. A stabilisation in oil prices since November and more dovish comments from the US Federal Reserve over the pace of future interest-rate rises have also helped anchor sentiment.

Meanwhile, Mr Trump’s early setback on healthcare reforms this month has cast doubts over his ability to deliver fully on his protectionist trade policies even though he continues to threaten to get rid of NAFTA..

“…we believe that risk premium in MXN may continue to be unwound,” said Societe Generale in a note earlier this month. “US President Trump’s aggressive and dictating posture has given way to a less hostile approach in re-negotiating NAFTA, while the realities of implementation hurdles facing Trump’s team are now surfacing.”

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