Citigroup Sees Record Mexico Rate Boost as Trump Sinks Peso

Updated on
  • Sell-off has dragged the currency to record lows this month
  • Citigroup sees rate rising 0.75 percentage point next Thursday

As far as Citigroup Inc. is concerned, Mexico has little choice but to carry out an unprecedented interest-rate increase to arrest a plunge in the peso triggered by Donald Trump’s recent surge in U.S. presidential polls.

Mexico’s exchange rate has tumbled 6 percent in the past month, the biggest slide among the world’s major currencies. Citigroup economist Sergio Luna now predicts Banco de Mexico will lift its key lending rate by 0.75 percentage point on Sept. 29, the most since the bank adopted a new benchmark in 2008.

The move will be “a result of the effect that the election in the U.S. has had on the currency,” analysts including Luna said in a Sept. 20 report.

Trump’s rise in voter-intention surveys is compounding investors’ concerns about Mexico’s deteriorating finances, its debt-laden state-owned oil company known as Pemex and sluggish economic growth. The Republican candidate for president has labeled some Mexican immigrants “rapists,” vowing to build a wall to keep them out -- and to compel Mexico to pay for it. He also has promised to end or renegotiate the Nafta free-trade deal that’s been key to Mexico moving from a largely closed economy to a global export and manufacturing powerhouse over the past two decades.

Citigroup isn’t alone. Banks including BBVA Bancomer SA, UBS Group AG, Goldman Sachs Group Inc. and Grupo Financiero Banorte SAB see a rate boost of 0.5 percentage point as Trump’s improved odds of winning the election exacerbate concerns about the peso and Mexico’s financial health. The currency rallied briefly after half-point rate increases in February and June that have pushed the benchmark to 4.25 percent.

Traders also are betting central bank Governor Agustin Carstens will need to act to prevent significant outflows from the bond market after yields on fixed-rate debt due in 10 years climbed to the highest level since June. Swaps used to bet on a rate increase in the next six months have soared to the highest since the aftermath of the 2008-2009 financial crisis.

Ricardo Medina, a spokesman for the central bank, declined to comment on speculation about policy makers’ actions at next week’s meeting. The peso weakened 0.6 percent to 19.7365 per dollar at 11:51 a.m. in Mexico City on Friday.

“You have concerns about Pemex, the need for cuts in public spending and then, on top of all this, you have the worry about Trump,” said Gerardo Rodriguez, a former deputy finance minister who now manages the $241 million BlackRock Total Emerging Markets Fund. “Mexico is clearly one of the countries most affected by the U.S. election, and that’s being reflected in the exchange rate and monetary-policy expectations.”