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Sat, 27th May 2017

Anirudh Sethi Report

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Peso hits new low … As Trump Presser Looms

The Mexican Peso has plunged to fresh record lows this morning on mounting concerns that Donald Trump’s trade policy could end the country’s privileged status among developing countries.

Looks like Banxico is going to need a bigger intervention…

As The Wall Street Journal reports, the selloff underscores gathering fears that the economic gains Mexico has made over the past two decades could reverse, as the incoming Trump administration takes a confrontational stance that could bring tariffs and border-control measures that until recently appeared unthinkable.

The North American Free Trade Agreement, which in 1994 created a free-trade zone among Mexico, the U.S. and Canada, cracked open the giant American consumer market to Mexican businesses in a way no other emerging market has ever enjoyed. Nafta has also brought relative stability to the peso after a series of currency crises, a crucial factor in reassuring foreign buyers of Mexican bonds and other assets.

Now that advantage could be in jeopardy if Mr. Trump follows through on pledges to renegotiate the agreement.

Luis de la Calle, a former top Mexican trade official, said Mr. Trump’s statements and policies that have caused the peso to decline could backfire. They would dent Mexicans’ ability to buy U.S. goods, which could expand the U.S. trade deficit. A weaker peso is also likely to spur more illegal immigration if Mexico’s economy falters.

“Trump is manipulating Mexico’s currency through his tweets—against the U.S. interest,” Mr. de la Calle said.

We suspect one mention on NAFTA in today’s Trump press conference and the peso breaks above 22/$.

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