What Has Happened to the Peso Since the Election?

Peso

In the aftermath of the U.S. presidential election, dynamics have been shifting around the world, both politically and economically.

Relations between the U.S. and Mexico have grown strained, with the prospect of a border wall and a suggested border tax causing anxiety on both sides of the border. Because all of these political posturings and promises have real impact in the financial and larger worlds, many analysts have been looking to how the Mexican peso has been affected in the time since the presidential election in the States. For a clue, leading policymakers in the Mexican government announced earlier this week that the central bank would offer an amount up to $20 billion in hedges on its currency. What are the reasons for doing this?

Aiming to Lower Volatility
The peso has seen unusually high rates of volatility recently, and the immediate intended effect of the hedges would be to damper the volatility levels plaguing the currency. This is a notable shift for Mexico on fiscal policy. Previously, as Reuters points out, it has been “one of the most orthodox supporters of free-floating exchange rates.” Now, Mexico’s position will be closer in line with emerging market economies in the rest of Latin America, such as Brazil, which uses derivatives as a means of supporting its currency.

Major Shift in FX Policy
According to Marco Oviedo, economist for Barclays in Mexico City, “this is the most important change in the approach to FX policy since the Tequila Crisis,” the economic disaster which inspired the free peso in late 1994. While it is not a fixed rate, “it definitely has an important impact on the level of the exchange rate,” he added.

In response to the announcement, the peso climbed by 1.8%, edging it just over 20 pesos per dollar for the first time since the November election. This was welcome news, even if brief, as the peso has dropped precipitously since Trump’s win. The country’s foreign exchange commission issued a statement indicating that “the peso exchange rate against the U.S. dollar has shown high volatility that is not consistent with the country’s economic fundamentals” over the past several months.

Plans slate the first auction of new instruments for March 6, with up to $1 billion at stake. Contract terms will be limited to 12 months. According to Banamex, the Mexican central bank typically looked to make an intervention of this type at times in which the peso was actually gaining compared with the dollar, as the organization felt that would maximize the impact of any announced changes. Dollar auctions last occurred in 2015, when the global price of oil dropped, although they were halted by February of 2016 as Mexican reserves declined.

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