Mexico has been in the crosshairs this week as US president Donald Trump held true to his campaign rhetoric and ordered the construction of a wall along the Mexican border, with White House press secretary suggesting a 20 per cent tax on imports could pay for it.
With relations between the two countries on course for crisis, has Mr Trump done enough to scare investors away from Mexican financial markets or are they holding firm until the stand-off plays out?
Trading in Mexico’s peso has developed a V-shaped pattern this year. Within 10 days it had dropped more than 6 per cent to a record low of 22.03 pesos. But the past fortnight has seen it recover nearly 5 per cent, much of that being regained since Mr Trump’s inauguration day.
Volatility is the peso trader’s constant companion. On Wednesday, it gained more than 2 per cent, despite Mr Trump signing executive orders to build the wall and curb illegal immigration. When Mexican president Enrique Peña Nieto cancelled his trip to Washington on Thursday, the peso fell more than 1 per cent. And on Friday, buying traders returned — the peso rose 0.9 per cent.
All this illustrates the danger of betting on positive peso signals prematurely, says Ulrich Leuchtmann, forex strategist at Commerzbank. “Anyone who does that underestimates the ability of the US administration to come up with surprises,” he says.
Traders are trying to work out whether the peso is now cheap, which might explain some of this week’s buying activity. The problem is trying to work out how the US-Mexico impasse will unwind.
The backdrop is a world of change, underlying structural tensions and trade inconsistencies, says Stephen Jen of Eurizon SLJ Capital.
“We see Mexico as being at the crossroads of many of the issues that are being discussed at present, and the only positive for the peso is its cheap valuation,” he says.
While the peso has been at the sharp end of geopolitical ructions, Mexico’s main equity market has remained largely insulated from souring US relations.
The blue-chip IPC is up more than 4 per cent since the start of the year and more than 12 per cent in the past 12 months.
Some stocks are benefiting directly from Mr Trump’s plans. Shares in Cemex rose to an eight-year high last week as investors bet that the world’s second-largest cement producer would profit from a massive construction project on its doorstep.
However, bank strategists are wary of the long-term outlook. UBS is forecasting a dip in the average forward price-to-earnings ratio from 17 times to 14-15 times this year across the index as growing risks are priced in.
The threat of “America-first” policies has already had a negative impact on prices for Mexican bonds, which reflect rising concerns about the country’s creditworthiness.
Mexico has one of the largest and most liquid bond markets of any developing country — in 2015 it was even able to issue a 100-year bond — yet has been largely absent from the rush of new emerging market debt this month.
Benchmark 10-year sovereign bonds are trading at a yield of 7.58 per cent — up from 6.18 per cent before the US election — a higher rate than Colombia, which carries a lower credit rating.
Investors say Mexican bonds are subject to the same concerns about a stronger US dollar as other emerging market credit, but are being dragged down further by particular worries about the economic impact of US policies targeting Mexico and the jump in inflation. If inflation is high and interest rates rise, bonds paying fixed sums will look less attractive.
Nomura predicts inflation will overshoot the 4 per cent upper target limit this year as fuel prices rise. “Mexico’s central bank has little choice but to continue hiking interest rates,” says Carlos De Sousa at Oxford Economics.