Mexico Peso Gives Clearest Market Signal That Trump Lost Debateby and
Peso leading emerging market gains in relief rally Tuesday
Implied volatility climbed to 2011 high in lead-up to debate
The Mexican peso rebounded from a record low in a sign investors perceive Hillary Clinton outperformed Donald Trump in the first U.S. presidential debate.
The currency rose 2.3 percent to 19.4372 per dollar as of 3:28 p.m. in New York, the biggest gain among more than 140 currencies tracked by Bloomberg. In a CNN/ORC poll of debate watchers, 62 percent said Clinton won the exchange. The peso has borne the brunt of investor anxiety about the November election, sinking to an all-time low of 19.9333 before the candidates clashed over trade, the economy and race relations at the forum Monday.
“Markets perceive a lower probability of Trump winning after the debate," said Andres Jaime, a strategist at Barclays Plc in New York who was the top forecaster for the currency in the first half of the year. “As shorts get squeezed, the Mexican peso is outperforming its peers.”
The bounce provides a respite for a currency that has posted the worst performance among its major peers in the past month, fueled by polls that showed Trump gaining ground on Clinton. It has lost about a third of its value in the past two years. While weak points in Mexico’s economy and emerging-market jitters are also contributing to bearish sentiment, traders and analysts say the recent slump is tied to the ascendancy of Trump, who has vowed to renegotiate the North American Free Trade Agreement if he wins.
“The stronger Hillary is, and the stronger the chance of her victory, the better for the peso,” Eduardo Suarez, a strategist at Bank of Nova Scotia in Toronto, said before the debate. He forecasts the peso will gain to 18.4 per dollar by the middle of next year.
One-month implied volatility on the peso, a measure of the cost of protection against future price swings, rose to the highest since November 2011 in the lead-up to the debate. It fell on Tuesday to 17.4 percent and was no longer the highest in the world.
Swaps traders saw the peso’s rally as likely to reduce the chances that the central bank will raise interest rates at its meeting Thursday. Three-month Mexican swap rates fell 0.08 percentage point, the most in a year, to 4.90 percent.
"A strengthening of 50 centavos” in the exchange rate “probably eliminates the necessity for a 50 basis-point increase" in borrowing costs, Suarez said.
Analysts have never been more split on whether Banco de Mexico will increase borrowing costs this week, with 11 economists saying rates will remain at 4.25 percent, seven seeing a half-point hike, and one expecting a 75 basis point increase.
Mexican stocks also gained, with the benchmark IPC gauge adding 0.9 percent. The rally was led by consumer stocks, with department-store operator El Puerto de Liverpool SAB rising the most since November and bottler Arca Continental SAB climbing the most in seven weeks.
Net short positions on the peso jumped to a record high in the week ending Sept. 20, according to the Washington-based Commodity Futures Trading Commission. HSBC Holdings Plc says the peso could fall to 22 per dollar in the event of a Trump victory.
The currency has often declined when Trump’s odds improved, but tends not to gain as much on data favoring Clinton, according to Alejandro Padilla, a foreign-exchange strategist at Banorte-Ixe in Mexico City.
“A Trump victory went from being a tail risk to being a real possibility, at least according to the polls,” he said. “This is why the peso would depreciate significantly, as it was being used to hedge the elections.”
The peso’s real effective exchange rate -- its trade-weighted value versus a basket of other major currencies, adjusted for inflation -- shows it’s undervalued compared with historical norms. The measure fell to the lowest since 2009 last week, according to a Barclays index, and is 16 percent below its 10-year average. The decline in oil prices, rising debt relative to the size of the economy and concern that investors will dump Mexican assets once the U.S. Federal Reserve starts raising rates have also contributed to the currency’s weakness.
“It’s like the bird that just can’t fly,” said Alejandro Silva, a money manager who helps oversee $180 million in assets for his Chicago-based Silva Capital Management, which sold 95 percent of its Mexican debt in May as the selloff picked up steam. “There are countries in which to invest that have macroeconomic problems, astounding deficit problems, inflation, some are in even in a recession, and they show less volatility than Mexico.”