Nafta Talks Are No Problem for Mexico's Peso (For Now)

  • Implied volatility in the currency nears a two-year low
  • Markets are pricing in a middle ground in trade negotiations

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As Mexico City prepares to host the second round of talks to renegotiate the North American Free Trade Agreement, currency traders seem to possess a surprising degree of calm.

Three-month implied volatility for the peso -- a measure of its expected swings against the dollar over the next 90 days -- has fallen to near the lowest level in two years. In other words, investors are looking pretty relaxed over any fallout from the talks.

The level of assurance is remarkable given Mexico’s dependence on trade with the U.S., the destination for almost 80 percent of its exports, and the severe selloff the peso saw last year when Donald Trump was threatening to rip up the deal. Even Monday, the currency led losses among emerging-market peers after Trump’s tweet the day before that both Mexico and Canada were being “very difficult” during the current renegotiation. BlackRock Inc. and Citigroup Inc. said the reaction pointed to a possible unwinding of long peso positions accumulated during this year’s rally. Others aren’t so sure.

“Nafta negotiations are important, but our base case foresees the countries reaching a middle ground,” Alejo Czerwonko, an emerging-market strategist at UBS Wealth Management, said over email. “From a long-term perspective, the peso still looks attractively valued.”

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