Mexico peso sinks to life lows after Trump's presidency win

Wednesday, 9 Nov 2016 17:48:06

Donald Trump has threatened to rip up a free trade agreement with Mexico. (Reuters: Jose Luis Gonzalez )

The Mexican peso has collapsed after Republican Donald Trump defied predictions and beat Democratic rival Hillary Clinton to take the US presidency in a maverick victory that wreaked havoc in global markets.

Mr Trump's threats to rip up a free trade agreement with Mexico, and tax money sent home by migrants to pay for building a wall on the southern US border once he is elected president, have made the currency particularly reactive to events in the race for the White House.

The peso weakened by more than 13 per cent in after-market trading for Mexico and in Wednesday trading in Asia, breaking past 20 pesos per dollar — its biggest fall since the 1994 Tequila Crisis.

The peso pared losses to trade around 10.17 per cent weaker at 20.18 per dollar early on Wednesday, after Mrs Clinton conceded to Mr Trump in a phone call.

"There's a lot of panic in the market, it is definitely an outcome it was not expecting," said Juan Carlos Alderete, a strategist at Banorte-IXE.

"The movements are very strong, the market is showing higher risk aversion in search of safe-haven assets."

Three economists said they expected the central bank to raise its benchmark interest rate by an impromptu 75 to 150 basis points on Wednesday, while one of them said the bank could instead opt for a swap with the US Federal Reserve pending how the peso evolves.

Tears as Trump elected president

As the US election results rolled in, eventually handing Donald Trump the presidency, there were tears among Hillary Clinton's supporters.

"I don't think a Trump scenario was taken seriously in the last days by the market. Hopefully there are some contingency plans by authorities and they can take measures to protect the Mexican economy," said Ernesto Revilla, an economist at Banamex and the Government's former chief economist.

Mexican central bank head Agustin Carstens last week said the country was ready in case of an "adverse" result in the US election, which he has said could hit Mexico like a "hurricane".

Mexico has foreign reserves of $US175.3 billion ($229 billion), and Mr Carstens said last month he would consider using a $US90 billion ($118 billion) International Monetary Fund flexible credit line "in the event of an external shock."

The central bank has already hiked its rate three times this year, lifting it to 4.75 per cent to anchor inflation expectations following a sharp depreciation of the peso.

The Mexican currency had rallied nearly 1.4 per cent before official election results began to be released, as final polls showed a Mrs Clinton advantage.

Volatility in the Mexican peso surged to its highest level since the global financial crisis in 2008.

One-month implied volatility, which measures the currency's anticipated trading range over the period, jumped to 40 per cent from 27 per cent.

"This is truly a historic moment. I don't recall such an extreme outlook on the US economy that could be so negative to the Mexican economy," said Benito Berber, an analyst at Nomura in New York.

Mr Berber said a Trump win could drive the peso to between 23 and 26 per dollar.

Reuters

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