Mexico’s currency has staged a remarkable comeback in 2017, after to falling to record lows in the days and weeks following Donald Trump’s unexpected victory in the U.S. presidential election.
After a torrid 2016, peso has been the world’s best performing currency in the first three months of this year, increasing its value against the U.S. dollar by 10.8 percent. This is the best quarter the peso has experienced in two decades.
On January 20, when Trump took office, the peso hovered around 20 to the dollar. When Ford announced it was abandoning its plans to build a new plant in San Luis Potosi, the currency dropped to over 21.
Since then, the turnaround has been extraordinary. At the close of markets Thursday, April 6, the peso was trading at a healthy 18.67 to the dollar.
While on the surface the peso may appear be in fine fettle, there are however some worrying signs for the Mexican economy.
On March 31, Mexico’s Central Bank (Banco de Mexico) raised interest rates for the fourth time since Trump’s election, no doubt concerned by a troubling mid-March annual inflation rate of 5.30 percent. The benchmark interest rate now stands at 6.50 percent, with inflation rising to its highest since the 2009 recession,
Justifying the rate hike, the bank issued a statement noting the “continued uncertainty” of the international scene.
The hike will help the peso maintain its value, at least in the short term, economists predict.
Another reason widely cited for the peso’s improved performance is that Trump’s collaborators have toned down the rhetoric regarding the U.S.-Mexico relationship, and the renegotiation of the North American Free Trade Agreement (Nafta) in particular.
Less talk of imposing tariffs on Mexican imports and more emphasis on protecting the positive elements of the bilateral relationship has helped restore confidence in Mexico’s currency, analysts say.
Some, including Citibank strategists, believe the peso cannot sustain its current value and that a fall is coming, sooner or later. Nonetheless, most banks have readjusted their end-of-year forecasts for the peso from around 21.50 to 20.50.