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Markets

Mexico peso headed for choppy waters on back of trade uncertainty

The Mexican central bank's most recent poll of analysts underscores the uncertainty surrounding the peso. The
22 Oct 2019
  • The Mexican central bank's most recent poll of analysts underscores the uncertainty surrounding the peso.
  • The real rate in Mexico is around 3.5pc, which is still very high and that will give stability to the peso.

MEXICO CITY: Mexico's peso is headed for choppy waters in what remains of 2019, as the ongoing US-China trade war and the uncertain fate of the new North American trade deal could cause the currency to fluctuate between 18.80 and 21 per dollar, analysts say.

The peso's immediate future ultimately depends on whether the world's two largest economies can resolve their trade dispute and if US lawmakers ratify the new U.S-Mexico-Canada (USMCA) trade agreement before it gets bogged down in the US electoral politics.

Market optimism over the future of these two issues lifted the peso on Tuesday to 19.0817 to the dollar, its strongest level in nearly three months.

If the USMCA is approved the peso could strengthen to around 18.80 per dollar, said Gabriela Siller, director of analysis at Banco Base.

The peso would, however, weaken if "if they do not ratify it this year.

That makes us think the approval would be pushed to 2021, because it's unlikely that will happen in an election year," said Siller.

US President Donald Trump on Tuesday criticized House of Representatives Speaker Nancy Pelosi for not bringing USMCA up for a vote in Congress.

Meanwhile, if US-China trade tensions escalate, the peso would weaken past 20 per dollar level, Siller added.

Trump on Friday said he thinks a trade deal between the United States and China will be signed by the time the Asia-Pacific Economic Cooperation meetings take place in Chile on Nov. 16 and 17.

Additionally, with the US Federal Reserve and the Bank of Mexico both expected to continue cutting borrowing costs, an attractive differential between US and Mexican yields will be maintained, giving additional support to the peso.

"The real rate in Mexico is around 3.5pc, which is still very high and that will give stability to the peso," said Marco Oviedo, chief economist for Latin America at Barclays.

The Mexican central bank's most recent poll of analysts underscores the uncertainty surrounding the peso.

The median forecast in the poll saw the peso ending the year at 19.75 to the dollar, but the range of answers was wide, going from 19.20 to 21 pesos.

So far this year the peso has gained around 3pc, trading between 18.7570 and 20.1435 to the dollar, according to data from Refinitiv Eikon.