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What a difference a week (or two) makes.
After sinking to yet another low last month, the Mexican peso has been fighting back over the past two weeks as investors – who had been cheered by Donald Trump’s promise to usher in a slew of pro-business policies – focus increasingly instead on the potential fallout from the president’s erratic, fly-by-the-seat-of-his-pants approach to foreign policies.
The peso is up nearly 6 per cent since January 20, making it the top performer among both major developed and emerging market currencies. The currency, up 1 per cent on Friday at MXN 20.3562, is now at its strongest level since mid-December and has pared its losses since Mr Trump’s election win in November to just 9.5 per cent.
The advance has come despite Mr Trump signing an executive order last week for the immediate construction of a wall along the US-Mexico border. The move – which was followed by a barrage of tweets by Mr Trump demanding that Mexico pay for the wall and threats of a possible 20 per cent tax on Mexican exports – prompted Mexico’s president, Enrique Peña Nieto, to cancel their planned summit meeting.
Analysts say one of the unintended consequences of Mr Trump’s hyper-tweeting might be that his tweets are losing their shock value to investors.
“The currency’s improved performance in recent sessions and, particularly, the continued foreign inflows into the local bond market suggest that investors have become less sensitive to bombastic announcements by the new US administration, and appear more eager to position in favour of a correction, after the massive underperformance seen in the past year,” said Gustavo Rangel, chief Latam economist at ING Research.
While Mr Rangel remains bearish on the peso, others, like Morgan Stanley, think the sell-off has reached an inflection point and have moved to increase their exposure to the currency.
“Without a doubt, Mexico remains exposed to the risks to its current trade-oriented, US-centric economic model, but it is also apparent that asset prices, especially the currency and local rates, already price in significant levels of risk premium,” said Gordian Kemen, a strategist at the bank.
“(R)isk/reward is improving and we expect that there is a window for improvement before the market turns its attention to domestic risk factors such as the presidential election in 2018.”
Others who think the peso is now undervalued include Bill Gross and Schroder’s head of EM debt, James Barrineau. The latter told Bloomberg he is gradually increasing his fund’s exposure to the currency after seeing “incipient signs” of stability.
“Mexico and Turkey are clearly two countries that will reach an inflection point at some point,” he said. “They have been under-performers for so long. That is where I think you might have a potential rally.”
The peso rally has also been helped by the broader weakness in the dollar. The DXY index – a measure of the buck against a basket of its major trading peers – has fallen 1.1 per cent over the past two weeks amid concerns over the ramifications from the new administration’s policies over trade and immigration.
But, as ING’s Mr Rangel cautioned, the peso’s current rally could well just be the calm before another storm.
“A strong catalyst for additional FX weakness could take time to materialize, in the form of tangible action by the US on trade or stronger evidence of adverse economic developments inside Mexico,” he said.
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