Summary:

• The Mexican Peso has been one of the best performing currencies this year
• Fears surrounding the economy after Trump’s victory have so far been misplaced
• Bank of America believe the Peso is now overvalued

 The victory of Donald Trump in last year’s US election was on of the greatest political upsets of all time and sent shockwaves throughout the markets. Stocks dumped before rallying, bonds and precious metal soared and then reversed strongly lower and the the US dollar was widely tipped for a prolonged period of appreciation. Part of the reasoning behind the expected rise in the buck almost across the board was the pro growth policies promised by the new administration but if there was one pair where Trump’s victory was most keenly felt it was the USDMXN.

The USDMXN exhibited a close relationship with the highs and lows of Trump’s campaign and when victory was assured there was an incredible rip higher in the pair. In addition to a huge fiscal stimulus and a substantial tax reform, which boosted the USD side of the pair, an anti Mexican rhetoric throughout his campaign, which was most clearly visible with the promise to build a wall across the US-Mexican, saw the Peso devalue rapidly. 

Since then however the expected narrative has failed to manifest itself, with Trump being politically frustrated at pushing through his reforms which would have supported the buck and his adoption of a softer stance with his southern neighbour. In light of this, the Peso has mounted a sensational comeback which has seen a gain of not far from 20% since December. 

 The Mexican Peso has appreciated strongly this year and outstripped other emerging market currencies

The USDMXN now trades below the level it did prior to the US election, and as was clearly evident in the market reaction to Trump’s victory, the price on 8th November offered little premium for Republican success. The market has shown signs of recovery in the past couple of weeks after bottoming at 17.45, but the market remains well below last year’s all-time high just above the 22 handle.

 

 The gains seen in the USDMXN after Trump’s victory have now been handed back

Bank of America believe that given the appreciation seen in the peso (which equates to a drop in USDMXN) there could be some sort of pullback. They offer three possible reasons that could act as fundamental triggers for a rise in USDMXN. They are as follows:

• NAFTA talks could go badly, or at least be volatile 
• Mexican economic growth is likely to slow down
• Next president (of Mexico) may not be market-friendly (elections due July 2018)