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The struggles of the Mexican peso
2019-11-11 • Updated
The USMCA agreement between the US, Canada and Mexico and the new president-elect inauguration were expected to shed some light on the MXN. However, the election of Andres Manuel Lopez Obrador resulted in many uncertainties for the investors and therefore weakened the Mexican peso. One of the main reasons is connected to his plans to reform the energy and oil industries, that is, to privatize them. In addition, the renegotiations over NAFTA created a huge volatility at the beginning of autumn. As a result, the peso has kept falling followed by the new risks to the country’s economy and new threats from its closest neighbor – the US.
The country’s economy has been heavily damaged by the highly-expensive infrastructure projects, including $13 billion airport in Mexico City, a train across five southeastern states and an oil refinery in Tabasco state. October's referendum failed to deliver a proper solution on the continuation of the airport construction. Some critics supposed it was a political move by the president-elect to get the support from the nation as only 1 million people were involved in the final decision. Following the results of an unfortunate referendum, the Fitch credit rating agency revised its outlook for Mexico to negative two days after the announcement of the airport cancellation.
As a result, it weakened the Mexican peso.
Right after the cancellation of the airport construction, the president-elect’s proposed to scrap the banks’ fees. This decision led stocks to fall to a three-year low. In an attempt to support the peso, the Mexican Central bank (Banxico) hiked its interest rate to 8% on November 15.
What else pulls the Mexican currency? Of course, the migration issue. On Monday, US President Donald Trump fuelled the situation by his tweet. He said the US will close its southern border with Mexico if needed. This was not the first time he made such comments: in October, he warned about the “caravan” of migrants approaching the US border. On the other hand, the Mexican president-elect Andres Manuel Lopez Obrador, shortly known as AMLO, promised visas and medical treatment to the so-called “caravan” of 8,200 people from Central America. In addition, he does not intend to limit the migrants from heading north. It is still unclear what the country gets while housing the thousands of Central Americans. Moreover, it can end the course of the good relationship between the US president and the Mexican president-elect.
We anticipate the end of the week to bring more volatility to the MXN.
At first, the USMCA agreement will be signed during the G20 summit. Canada and Mexico hope the US will drop its steel and aluminum tariffs. However, according to analysts, the US can impose quotas instead of tariffs, which will not be welcomed by Canada and Mexico. If the further uncertainties, appear, the MXN can slip. In addition, AMLO and his administration will take the cabinet on Saturday. His new reforms have already shaken the market.
However, there is a chance for the Mexican peso, because the upcoming finance minister Carlos Urzua announced a nomination of the new central bank deputy governor Gerardo Esquivel on Monday. The Tuesday’s comments made by Mr. Urzua about a larger primary budget surplus next year increased the investors’ confidence.
USD/MXN reached its July highs on Monday, closing above the 20.5 level. The negative news about further policy actions by president-elect will help the pair to rise towards the resistance at 20.70. Otherwise, the successful USMCA deal and hawkish comments by the new administration will pull the pair downwards to the support at 20.06.
To conclude with, the strength of the Mexican peso is heavily depended on the policy decisions by the upcoming administration. If Andres Manuel Lopez Obrador gets on well with US president Donald Trump and makes supportive reforms for the economy, we can expect the peso to recover.
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