What: On Tuesday Donald Trump stated at a campaign rally in Phoenix that he would close Congress if necessary to build a wall along the US/ Mexico border to stop the flow of undocumented Mexican immigrants entering the US. This has spooked Mexican peso traders, which had been one of the top performing EM currencies so far this year.
The “wall” is not the only political risk that could knock the peso this year, the renegotiation of Nafta and the potential fallout that could impact the Mexican/ US trade relationship could leave traders wary of getting too exposed to the peso when the political risks are rising, especially since the MXN has risen nearly 20% vs. the USD since January.
How: As we move into September the risks are only likely to rise for the MXN. Not only are Nafta negotiations ongoing, but the US debt ceiling will be reached by the end of September. Congress has to agree to lift the ceiling or else the government could face a shutdown. This happened in 2011, back then US stocks plunged, the US lost its top credit rating and growth in that quarter also took a hit. This time, if Trump digs his heels in about the Wall with Mexico, which we expect him to do due to the failure of his more recent political exploits, then we could see the peso come under sustained attack and suffer a rough end to 2017.
Our call is that USD/MXN may have reached the end of its downtrend, and it could be about to stage a recovery into the end of 2017, especially since the outcome of the political risks mentioned above are singularly negative for Mexico. Key resistance levels for USDMXN include: 18.26 – the 100-day sma. After this, a key test for a sustainable USD/MXN recovery would be a break above the 19.20 level – the 38.2% retracement of the Jan peak to July trough, this also corresponds with the 200-day sma. If this pair can break this level it would suggest that there is the potential for further upside above 20.00.
Chart 1:
Source: City Index and Bloomberg
Chart 2:
Source: City Index and Bloomberg