Writing May Be on Trump’s Wall for Mexico’s Beaten-Down Peso

  • Who foots the bill is key to determining price, Natixis says
  • Top forecaster says U.S. trade-policy could roil market

Is Bad News Already Baked In for the Mexican Peso?

Analysts attempting to predict the outlook for the world’s most-volatile major currency often complain it’s a pain in the neck, at the mercy of unpredictable politics. For the most accurate Mexican peso forecaster though, the answer to one question will give clarity:

Who will pay for the wall?

Juan Carlos Rodado, the head of research at Paris-based bank Natixis SA, told clients in a note this week that he’s looking at three possible scenarios to determine the course of the peso this year. They all revolve around who foots the bill -- at least indirectly -- to build Donald Trump’s proposed barrier along the countries’ border.

The most favorable scenario for the peso is that the U.S. finances the construction, thus weakening the dollar while doing only symbolic damage to Mexico and sending the peso up 4.6 percent by the end of the year. Slightly worse would be the idea that Trump floated to put a 20 percent tax on Mexico’s exports to the U.S., which would send the peso down 2.7 percent. The worst scenario for the currency, according to Rodado, would be that the wall’s funding comes from a broader border adjustment tax that would boost the dollar, spur U.S. inflation and curb corporate profits -- sending the peso near a record low at 22 per dollar.

The peso outperformed all major peers on Thursday, gaining 0.3 percent to 20.4201 at 11:41 a.m. in New York.

Trump’s decision on trade policy “will change the big picture entirely,” Rodado, who Bloomberg data showed to be the most-accurate forecaster for the peso during the second half of 2016, said in an interview.

The currency has been at the mercy of U.S. politics since the presidential election campaign got into full swing last year, when it would generally weaken as Trump’s prospects improved and strengthen when Democratic rival Hillary Clinton appeared to be gaining ground. The currency tumbled to a record low after the election results and has since been battered by Trump’s efforts to cajole manufacturers to produce more in the U.S. instead of Mexico.

The peso’s one-month historical volatility, a measure of price swings, is the highest among the world’s most-traded peers. The currency has rallied 5.4 percent since Trump’s inauguration on growing conviction that the selloff had gone too far given the view that the exact details of Trump’s plans remained so opaque.

Mexico’s economy is tied at the hip to the U.S., the destination for about 80 percent of its exports.

“Forecasting the peso could be seen as an esoteric act given the large amount of uncertainty surrounding Mexico’s economic outlook," Rodado wrote in his note.

— With assistance by Lester Pimentel

    Before it's here, it's on the Bloomberg Terminal.