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Peso sinks to new low as Mexico’s woes mount

For more evidence that central bank intervention in the foreign exchange market is increasingly becoming an exercise in futility – look no further than Mexico.

The peso briefly sank to a fresh all time low against the dollar on Tuesday, dropping by as much as 1.1 per cent to MXN 21.6227, as concerns continue to mount over incoming US president Donald Trump’s trade rhetoric towards Mexico, report Pan Kwan Yuk in New York and Jude Webber in Mexico City.

The slide comes despite the Bank of Mexico’s two day intervention last week. The central bank said on Tuesday that it spent a total of $1.816bn defending the peso on Thursday and Friday, a move that prompted its international reserves to drop to $174.7bn.

“That’s a hell of a lot,” said Mariana Ramírez, economist at Ve Por Más, a Mexican lender, noting that the central bank’s last intervention was last February, for a similar amount. She said the peso had taken a hammering this morning in part because traders were waiting to see the size of Banxico’s intervention, and in part because of nervousness ahead of Mr Trump’s scheduled news conference on Wednesday.

After ending 2016 as one of the worst performing emerging market currencies with a 17 per cent drop, this year has thus far offered little respite for the peso. Barely 10 days into the new year and the Mexican currency has already shed 4 per cent of its value against the dollar and set two record lows.

Ve Por Más estimates the peso will close 2017 at 22.2 to the dollar – implying further slides as Mr Trump takes office and his policy agenda becomes clearer.

Mr Trump’s election as US president in November has battered the peso. But the currency steadied somewhat in December amid hopes that Mr Trump was unlikely to go through with his controversial campaign promises — including withdrawing the US from Nafta and building a wall along the US-Mexican border.

But that hope quickly faded last week after Mr Trump took to Twitter and criticised car makers with operations in Mexico. Concerns that manufacturers would curtail investments in Mexico have been compounded by Ford, which said it was scrapping plans to build a $1.6bn car facility in the country in favour of further investment in the US.

This was followed by Fiat Chrysler’s warning yesterday that it may close its Mexican car plants if Mr Trump imposes sufficiently stringent tariffs on vehicles coming into the US.

The escalation in trade worries come as Mexico is being hit by headwinds in other parts of the economy.

On the inflation front, a move by the government to cut gasoline subsidies on January 1 is expected to raise annual inflation – which is already running at a two year high in December. Higher inflation in turn is expected to further erode consumer spending power and reduce domestic demand in 2017.

This combined with the pressure on the manufacturing sector and still low oil prices has prompted some analysts to warn about the growing possibility that Mexico could suffer a recession this year.

Bill Adams, senior international economist at PNC Financial Services, reckons there is now a 2 in 5 chance that Latin America’s second most important economy will contract. The average economist forecast is still predicting Mexico to grow around 1.7 per cent this year. The main outlier is Wells Fargo, which is forecasting Mexico’s GDP to shrink 1.1 per cent this year.

…political rhetoric on presidential campaign regarding Mexico, from the Republican candidate, has the potential to disrupt the achievements of the Mexican automobile sector and set back its recent expansion. Today, it is very difficult to know how severe the adjustment the Mexican auto industry would have to make to accommodate the requirements of the Trump administration regarding NAFTA. However, it will probably put any potential industry investment in stand-by at least until there is more clarity on the future policy path and/or on the results from a renegotiation of NAFTA. Thus, we are not saying that Mexico is not going to continue to produce automobiles for the U.S. market.

However, we are probably not going to see the growth rates we have seen during the past several years. Of course, the expectation is that the lobbying arms of all the interested parties are trying to negotiate a “viable” solution to Trump’s political discourse, i.e., something similar to the Carrier agreement in Indiana? In any case, any agreement will hamper the recent expansion of Mexican automobile production, exports to the U.S. market as well as investment plans in the automobile industry in the country.

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