Will The Mexican Peso Continue To Rise?

| October 4, 2016 | 0 Comments

pesosWill the rebound of the Mexican peso continue? In a September 28 report, Capital Economics author David Rees wonders if what is considered a Trump victory proxy will continue a move higher. When investors consider the peso through the narrow lens of a political equation alone, are they missing the larger story?

Mexican Peso Capital Economics graphic

Mexican Peso Capital Economics graphic

Trump success and Mexican Peso negatively correlated

After Monday’s US presidential debate, in which the edge was given to Hillary Clinton, the Mexican peso rallied. The move was widely attributed as a statement on the diminished potential for Donald Trump to be elected.

Rees noted the Mexican peso, in fact, rose by more than 2% against the US dollar shortly after the debate Monday.

But it wasn’t just Monday.

Rees goes back to the point the head-to-head match-up between Clinton and Trump started to get hot. Starting in June Rees observes a strong correlation between the probability of Trump winning and the fall in the value of the Mexican peso.

Such a correlation should be “hardly surprising,” particularly given Trump’s “bellicose stance towards Mexico.” Trump has consistently advocated protectionist trade policies, Rees noted, and this would likely result in “bad news for Mexico’s open and US-dependent economy.”

An HSBC report backed up this analysis, pointing to an investment strategy to sell Mexican assets if Trump were to emerge victorious.

“A victory for Mr. Trump on 8th November would probably cause the peso – and indeed most emerging market (EM) currencies – to weaken against the US dollar,” he predicted, pointing to uncertainty regarding trade policy. This could include potential renegotiation of the NAFTA trade accord, which would most directly impact Mexico.

While the notion that a Trump presidency would drop protectionism around the globe is the popular meme, Capital Economics does “not believe that the worse fears of protectionism will be borne out.” The degree to which protectionism comes into play was not assessed.

“Once the dust settles on the US election and a probable Fed rate hike in December, we would not be surprised to see the peso stage something of a comeback in the next couple of years, as prior structural reforms help economic growth to finally build momentum,” Rees wrote.

Is the peso’s only performance driver Trump?

The future success of the peso, much like Trump wall proxy stock Martin Marietta Materials, is likely to be tied to Trump’s to success to various degrees, but there are also other factors. While Martin Marietta was riding high in mid-July, the stock fell nearly 15% over the course of the summer, trading near $208, it steadily trended lower since then, finding a near-term bottom near $172 in the middle of September and bouncing to close at $182.50 today.

The Mexican peso and Martin Marietta are not tightly correlated since June of this year when the head to head election season ramped up, and this sends a message.

Could it be that the Mexican peso has been responding to other stimuli? Is the currency not the pure Trump play that it is being cast as?

It is no accident the Bank of Mexico raised interest rates by a half percentage point on Thursday, as the move was widely anticipated by economists. Sovereign interest rates drive currency values to a large extent, and the anticipation of increased rates is likely a factor that has been driving the value of the peso over the near term.

The Bank of Mexico said it is “closely watching the exchange rate and possible pass-through to prices,” but isn’t targeting a set exchange rate for the 10th most traded currency, frequently a proxy for global risk and considered a safe haven of sorts, as Bridgewater Associates noted nearly one year ago. Franklin Templeton’s Michael Hasenstab has also cited Mexican assets as a hedge against global risk, doubting that Mexico will build or pay for a US wall.

A previous Capital Economic report pondering the impact of a Trump election on the fate of the peso, noted that the Mexican currency was lagging many of its regional counterparts before Trump’s rise in the polls.

The importance of Trump as it relates to the Mexican currency is likely a matter of degree. But elections can always be emotional endeavors, as French philosopher Alexis de Tocqueville wrote in his 1830s book Democracy in America.

“A presidential election in the United States may be looked upon as a time of national crisis,” Tocqueville wrote. “As the election draws near, intrigues intensify, and agitation increases and spreads. The citizens divide into several camps, each behind its candidate. A fever grips the entire nation. The election becomes the daily grist of the public papers, the subject of private conversations, the aim of all activity, the object of all thought, the sole interest of the moment.”

For investors, the key to success could be eliminating the emotion from their decision-making process.

 

Note: The author of this article is Mark Melin. He is a contributor to ValueWalk.com.

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The author of this article is a contributor to ValueWalk.com. ValueWalk is your everyday source of breaking and evergreen news on everything hedge funds and value investing.

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