​Mexican Peso: A Pummeled Piñata, But Candy Awaits

Ivan Illán |

The Mexican Peso (MXN) has fallen dramatically post-Trump victory (see chart below). From November 8, 2016 through January 6, 2017, the peso fell more than 15% relative to the US Dollar (USD). The drivers for this movement have been clear. Fears abound, as Trump rhetoric on border security and wall building, tariff impositions, and a wholesale review of the so-called “worst deal ever” – NAFTA, have weighed heavily on the peso’s current value and outlook.

To add to these US-centric political pressures, a recent move by the Mexican government to cut gasoline subsidies is sure to contribute to rising inflation, which would further hurt their waning domestic consumption (see chart below) while increasing the possibility of recession in Mexico this year. With all these headwinds, it’s no wonder that the Mexican peso has been treated like a piñata at a kid’s birthday party. But, there’s a bright side.

The biggest positive for the peso’s future is that nearly 40% of the imported goods value from Mexico to the US is actually “Made in USA”. This means that potential US tariffs imposed on imported Mexican goods would have the effect of directly impairing the earnings of the very US companies that Trump has vowed to protect. In addition, Mexico is a consumer nation, and it’s in the US's best interest to keep our neighbor to the south in a healthy economic state. Mexico buys more from the US than Brazil, Russia, India, and China – combined! A severely devalued MXN would only serve to backfire on US interests, making US goods too expensive, and ultimately hurting US corporate revenues and earnings.

Though the year ahead will undoubtedly be a volatile one for the MXN/USD exchange rate, it will most likely bottom out around 23 MXN / 1 USD as Trump administration rhetoric heats up later this year. By year-end, it would be realistic to see the peso strengthen to levels seen prior to the November 2016 election, in the 18.25 to 19.75 MXN / 1 USD range. Such a recovery would be viewed as sweet candy indeed, by both domestic Mexican business consumers and the many US exporting companies who are so reliant on their orders. – I.M.I.

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