What is guiding the sentiment in the currency market in Mexico these days? The answer is not straightforward, with many factors impacting the fluctuations the Mexican peso has experienced throughout 2018.
2018 Presidential Elections
Earlier this year, pre-election concerns about Andres Manuel López Obrador (AMLO) becoming president rippled through the business community in Mexico, culminating in the Mexican peso hitting an 18-month low of 20.80 MXN to USD on June 18, 2018, two weeks before the election.
Directly after AMLO’s victory, the value of the peso against the dollar began to strengthen. During the post-election period, it reached its high point of 18.57 MXN to USD on August 5, 2018. After decreasing a bit, it is currently at 18.70 MXN to USD. The statements of the soon-to-be president and his team on fiscal discipline and the central bank´s autonomy have given confidence to the markets. Still, the peso will see continued volatility in the run up to AMLO taking office on December 1, 2018.
The recent underperformance of emerging markets is another focus point for the local currency. Rising global trade tensions and the U.S. Federal Reserve’s interest rate hikes have contributed to a broad selloff of emerging market currencies. Other macroeconomic factors affecting emerging markets this year include the strong dollar, financial volatility in Argentina, political unrest in Brazil, trade wars between the U.S. and China and turmoil in Turkey.
The good news is that the peso has reacted better than other currencies in this group, partly because of post-electoral confidence and its improving economy, with economic growth estimated at 2.6 percent this year. However, geopolitical and commercial issues continue to be a concern to the local market.
Monetary Policy and Inflation
More micro-economically, two factors influencing the Mexican currency market are its domestic monetary policy and inflation. After raising rates 13 times since December 2015 to 7.75%, Mexico’s central bank is currently holding steady on its benchmark interest rate. Its next announcement on monetary policy is scheduled for next week, with most analysts expecting no rate hike. Additionally, an improvement in inflation expectations removed some pressure of the central bank for a rate hike, leading to a stabilization of the exchange rate. All this could change if the central bank does indeed raise interest rates next week.
Investors across North America have been closely watching the renegotiation of the North American Free Trade Agreement, with market participants considering its affects to be more crucial to Mexico than to its partners. After Canada stepped out of negotiations, the U.S. and Mexico agreed to a bilateral trade agreement, giving investors hope for further deals with the U.S. At this time, it is unclear how the new NAFTA and subsequent tariff changes will affect the currency market as a whole, and the Mexican Peso in particular. Stay tuned to Fortex for future updates on the currency markets in LATAM, and beyond.
For additional commentary on the LATAM markets, please reach out to the Forex LATAM team at [email protected].