Why the Mexican peso continues to plunge against the US dollar

Emerging economy hit hard by falling oil prices and doubts over US presidential election

The dollar is stronger than ever against the peso.
The dollar is stronger than ever against the peso.EFE

The Mexican peso has been in freefall for a week as its value plummets against the US dollar. By Thursday, one dollar was worth 19.65 pesos, one of its highest levels in the last few years. Falling oil prices and tensions caused by the upcoming presidential election in the United States have accelerated the depreciation of the Mexican peso over the last few days.

Though the Mexican currency stabilized during Thursday, its value had already dropped by 1.7% over the previous six days. Oil prices are sinking all over the world since crude inventories in the United States fell 559,000 barrels. Mexico's oil mix now sells at $37.07 per barrel when last week it was worth $39.79.

The best case scenario for the currency would be a win for Hillary Clinton in November 

Concerns the Federal Reserve (Fed) might raise interest rates is hitting the Mexican peso hard. In June, after the UK’s Brexit vote, the Bank of Mexico raised interest rates to halt the decline of the peso. Rates went from 3.75% to 4.25% and the currency remained stable throughout the summer. The Mexican peso is the second most volatile currency among emerging market economies after the Brazilian real. Its performance is historically largely due to economic and political indicators in the United States.

This year’s US presidential election in its northern neighbor has put pressure on the peso. The rise of Donald Trump, the Republican presidential candidate who says he opposes free trade with Mexico, has panicked investors into dumping the peso. Furthermore, over the last week, Trump has recovered the ground he lost in the polls and continues to maintain tough positions regarding US relations with Mexico, especially on economic and immigration issues.

This year’s US presidential election in its northern neighbor has put pressure on the peso

His visit to the Mexican presidential residence in Los Pinos on August 31 drew widespread criticism within the country. Mexican Treasury Minister José Antonio Meade said on national television on Wednesday night that Trump’s visit has lowered the country’s risks when it comes to monetary policy. Meade admitted that conditions in international markets put pressure on interest rates but he did not endorse the theory that Trump himself influences the markets. “We are not sure whether or not it is an issue that specifically has to do with Trump, or in general terms, with doubts that the result of the election in a country that is our main trading partner always create,” Meade told a Mexican radio station on Thursday.

A Donald Trump win in the upcoming presidential election would cause a significant decline in the value of the Mexican peso, according to Oxford Economics, a British forecasting firm with offices in the United States. “A Donald Trump victory would be bad, but not catastrophic for Mexico.” Though Hillary Clinton has lost some support among voters, the group says, Trump is only 20 percent likely to win the White House.

The Mexican peso could close the year at 19.80 to the dollar, say some pundits. The best case scenario for the currency would be for Hillary Clinton to win in November and for the Fed to not raise interest rates until December. But, if the Fed acts before December, the Bank of Mexico is expected to do the same though it will not improve the position of the peso.

English version by Dyane Jean-François.


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