Goldman Sachs Group Inc. says the Mexican peso could gain back most of this years’ losses against the dollar if Hillary Clinton wins the U.S. election. But if Trump becomes the next president, it’ll more than double its losses.
The peso is the second-worst performer among emerging markets this year after Argentina’s currency, falling 11 percent as global sentiment toward developing nations soured. It hit a record low this week before recovering after democratic candidate Hillary Clinton was perceived to be the winner in the first televised debate. The peso edged higher Thursday, trading at 19.3674 per dollar at 1:37 p.m. in New York, reversing losses after the central bank raised the benchmark interest rate half a percentage point to 4.75 percent.
The U.S. is by far Mexico’s biggest export market, buying more than 10 times as much from Mexico last year as the second-largest, Canada. If he wins, Trump has promised to rewrite the North American Free Trade Agreement, which governs commerce between the countries and has helped transform the Mexican economy in the last two decades.
“A significant part of Mexican peso underperformance cannot be attributed to global macro factors and likely reflects a ‘U.S. elections premium,’” the New-York based bank said in a note to clients by analysts Mark Ozerov and Kamakshya Trivedi. Were Clinton to win, the peso could potentially gain 9 percent to 10 percent as that premium is removed.
In case Trump wins, the peso would lose as much as an additional 20 percent to near 24 pesos per dollar, the note says.
“It could be smaller if there is a potential shift of Mr. Trump’s rhetoric away from renegotiating trade agreements” or if a rapid depreciation prompts action by the Mexican central bank through more aggressive rate hikes.
The peso recovered from losses of about 0.5 percent after the central bank boosted the lending rate for the third time this year on concern the peso’s tumble may fuel inflation and threaten to roil the nation’s financial markets. Economists surveyed by Bloomberg before the decision had never been so divided, with 12 expecting no change and 15 others forecasting increases of 0.25 percentage point to as much as 0.75 percentage point.
Thursday’s increase “isn’t going to stop it depreciating if Trump pushes ahead in the polls,” said Chris Lawrence, a rates and currency strategist at Rabobank NA in New York. “And if Trump wins this election, the currency will depreciate meaningfully and the central bank will have less firepower to combat it.”
One-week implied volatility on the peso, a gauge of traders’ expectations for price swings, has climbed to the highest in the world. Net short positions on the peso jumped to a record in the week ending Sept. 20, according to the most recent data from the Washington-based Commodity Futures Trading Commission.
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 on Monday, according to a Barclays index, and is 16 percent below its 10-year average.
Miguel Benedetty, a currency analyst at INTL FCStone Ltd., said the minutes from the bank’s meeting to be released on Oct. 13 will be a key indicator for the peso. He’ll be looking to see whether policy makers talk up the possibility of higher interest rates or intervening in the market, or are more sanguine about risks for the peso.
“If the minutes are hawkish, the peso could move past 19 per dollar,” he said. “But if the market thinks it lacks the hawkish tone, it could move back to record weak levels around 20.”