Mexican Peso Recovering from Deep Dive

After a record decline, the Mexican peso is rallying, buoyed by good news in both Mexico and the United States. After a staggering drop after US elections, the peso is rebounding, and the future looks promising for the Mexican economy.

The Decline of the Mexican Peso

When Donald Trump was elected US President in November of 2016, the Mexican peso took a beating. Trump’s campaign platform included several policies considered negative for the Mexican economy and Mexico-US trade. Among Trump’s policies most feared by the Mexican markets were:

  • Threats to scrap the North American Free Trade Agreement (NAFTA)
  • Intentions to tax Mexican imports and remittances
  • Plans to build a wall along the Mexican border and require Mexico to pay for it

Trump’s rhetoric made investors nervous, and when he was declared the winner of the US presidential elections, the peso responded by declining 11% over the next two months to an all-time low of 22 pesos per US dollar.

The Rally

The night before the election, the Mexican peso was trading at 18.50 per US dollar. Today, it has almost completely rallied and sits at 18.70 pesos per dollar. The rally is thanks in part to a contingency plan prepared in case of a Trump win and later implemented by the Mexican central bank. The bank hiked interest rates four times in the past few months, including a recent quarter-point hike last week in an effort to keep pace with the US Federal Reserve rate hikes and to boost the currency’s value. Additionally, the Mexican bank sold dollars to foreign investors.

But also contributing to the comeback for the Mexican peso and calming the nerves of investors is a recently leaked memo from the Trump administration indicating they will in fact not seek to withdraw from NAFTA but rather make relatively minor updates to it.

Outlook for Mexican Economy

As things cool down with the Trump administration and Mexico’s monetary policies take hold, the Mexican peso will continue to strengthen. Sireen Harajli, a currency strategist at Mizuho Bank Ltd. in New York who successfully predicting the peso’s status in 2015, believes the year will end with the Mexican peso trading at 17.30 per US dollar. In a recent statement, he pointed out the factors currently at work in the rally and how they will continue to strengthen the Mexican economy, adding:

Negative effects from higher volatility will be mitigated by central bank policy as Banxico aims to curb excessive currency weakness. Fundamentals will prevail in the second half of the year.

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