When the President of Mexico considers his strategic position, he’ll notice something outside the raging Mexican nationalism that currently animates much of the population, he’ll notice a plunging peso and the consequent fear of losing out to a stronger, more versatile American partner. This will not be an easy ride for any Mexican executive, but I countenance that even a strong leader like Augustin Carsten’s and his tenure at the Mexican Central Bank possesses limited manuvering regarding carry trades, floating exchange regimes, and volatile geopolitics. This can end very badly for Mexico.
The peso has always been used by global financial institutions as the primary instrument for hedging, especially regarding emerging markets and variable risks associated with the developing world. Why? Well, the peso is by far the most liquid emerging market currency; one with few restrictions on trading. The peso moves alongside the dollar and a few other major currencies, it also historically keeps apace with fluctuations in nominal policy movements by the U.S. Federal Reserve as well as nominal interest rates and commodities.
In recent months though, President Trump’s aggressive rhetoric have decoupled the peso from solid market fundamentals. Although historically tied to Mexico’s stable export dependent economy, it now floats unanchored. This isn’t good for either the U.S. nor Mexico.
As it now stands, interventions to prop up the peso have failed, instead of providing a floor to anchor or underwrite currencies associated with emerging markets, the Mexican peso has fallen nearly 6% in January alone. This kind of volatility is eroding the peso’s appeal and effectiveness as a hedge in emerging markets.
If “the Donald” as done anything, he’s promoted currency manipulation.