It has been a gold medal and a source of anger. Since Andrés Manuel López Obrador won the presidential elections in the summer of 2018, the Mexican peso has functioned as a buffer against the shocks generated by his government. He also held a sustained appreciation that the president boasted as his success. Today, after his party won a majority in Congress, much of those gains have been lost and the markets once again became the object of criticism for the president.
In a country where the exchange rate is an important part of the economic culture, its ups and downs under López Obrador surprised analysts for different reasons. On the one hand, the currency is the favorite of operators in the market to make bets that have nothing to do with Mexico. The peso trades 24 hours a day, five days a week, all over the world. Average daily turnover is equivalent to $114 billion, according to data from the Bank for International Settlements (BIS), more than any other emerging market currency (with the exception of the Chinese currency).
This liquidity makes it Wall Street’s favorite to bet on markets other than Mexico. For example, if a trader You want to bet in Türkiye, but you find yourself in a market without available liras, you invest in pesos. This is why events like Brexit hit the Mexican currency hard (it fell 7% in the first hours), because the logic was that emerging markets, as part of global trade, would be greatly affected.
On the other hand, when it comes to domestic events, the weight does not usually react with such sensitivity. During the current Administration, for example, there were two changes in Treasury Secretaries that did not significantly impact the exchange rate. Nor did the currency move strongly when the Senate approved a reform to a controversial Bank of Mexico Law that violated its autonomy. (The initiative died in the Chamber of Deputies). Not even when, last year, it was announced that debt would increase to levels not seen in more than 30 years, the currency depreciated sharply.
But with López Obrador, the story has been atypical and began before he took power when, in October 2018, he announced the cancellation of the largest infrastructure project of the previous Administration, a new airport for the country’s capital. The peso depreciated 2% in just a few hours. It was the first sign for investors that his would be a government of confrontation with the private sector.
Equally atypical was the episode of appreciation that was seen from mid-2021 until April of this year, when the dollar went from trading at 20.19 pesos to 16.34. That is, an appreciation of 19%. Driven by remittances, foreign investment and, above all, investment in financial instruments that offer attractive returns, the strength of the peso surprised analysts with more pessimistic forecasts for the Government of the Fourth Transformation. In various conferences, López Obrador spoke of the currency as a sign of the confidence that the markets had in his Government, earning himself a medal that has more to do with external factors, such as the performance of the US economy and the rates offered by other instruments. countries.
The episode came to an end three weeks ago, when the ruling party and its allies won a majority in the Chamber of Deputies and the Senate. López Obrador seeks to reform the judiciary so that judges are elected by popular means, as well as eliminate autonomous bodies. The new majority could guarantee that these reforms pass, which is why investors reacted nervously to the possibility that Mexico would lose checks and balances and investments would lose guarantees.
Since the elections were held on June 2, the peso has lost 8.1%. This eliminates a large part of the gains achieved under the Administration so far. Between December 2018 and to date, the peso has appreciated 9.5%. The dollar is now trading at around 18.40 pesos. For the president, the markets stopped being the allies that validated his government project and he attacked them saying that they are “convenient domes” that “do not think about the country.”
“If the reform passes as it is now, the dollar could be quoted at 20 pesos and depending on how much risk aversion this generates, it could rise even more,” says Gabriela Siller, director of economic analysis at Banco Base. Investors are now paying attention to the implementation of the reform of the judiciary, which concerns them the most, adds the specialist.
“This holding elections on June 1 where 1,600 people are elected to the judiciary sounds chaotic. It is possible that the reform is carried out, but then the implementation could be staggered or not as strong as is being proposed and this would somewhat mitigate the risk aversion that exists in Mexico,” adds Siller. In addition to the exchange rate, risk aversion was reflected this week in the auction of Government bonds maturing in 30 years, which were quoted at a historically high rate of 10.16%. Compared to the same bond auctioned the previous week, this one charged 51 basis points more.
For their part, economists from the English firm Capital Economics, Jasontuvoy and Kimberley Sperrfechter, also see a depreciation of the peso towards the end of the year. “The peso had long seemed primed for a sharp decline given the magnitude of its previous overvaluation and is now within striking distance of our year-end forecast of 19 pesos per dollar,” they wrote in a report to clients published this week.
The low production of the state-owned company Petróleos Mexicanos, as well as the possibility that Donald Trump wins the US presidency in November, are reasons why Capital Economics already saw the peso as an overvalued currency.
“We still have months ahead of us with a lot of volatility,” warns Siller, “because in July comes the Republican national convention where Trump would already be the presidential candidate and could begin to speak against Mexico. Then, on September 1, the new legislature arrives where these reforms could be approved and on October 1, Sheinbaum takes office.”
“It could be that on October 1, risk aversion begins to decrease with a new administration that may soften the way the reforms are proposed,” concludes Siller.
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