Markets News

Mexican peso's 2020 déjà vu: Trump on the campaign trail

MEXICO CITY, Jan 6 (Reuters) - Mexico’s peso is seen headed for choppy waters in the second half of 2020 as the U.S. presidential election campaign kicks into high gear and is set to ripple through the foreign exchange market, according to analysts.

They say U.S. President Donald Trump could resort to using Mexico as a verbal pinata on issues of trade and migration to stoke his base and improve his reelection chances.

During Trump’s successful 2016 bid to reach the White House, his verbal jibes against Mexico helped make the peso the third worst performing emerging currency against the dollar that year; it weakened almost 21%.

Some analysts have said that a new regional trade deal to replace the 1994 North American Free Trade Agreement (NAFTA) should help usher investment into Mexico and reduce volatility for the peso.

Revised terms were agreed late last year for the U.S.-Mexico-Canada Agreement (USMCA) to replace NAFTA after months of wrangling to ensure tougher labor standards in Mexico.

But some argue that if Trump were to talk tough on trade with Mexico, that could still hobble the peso.

“Although we have the USMCA, we shouldn’t think we are going to avoid the threats of protectionist measures that Trump and his electorate love,” said James Salazar, an economist at CI Banco. “The elections in the United States will be the main risk factor for the peso,” Salazar added.

For the moment, though, the issue of Mexico is on the back burner in Washington, which is focused on the impeachment of Trump and the U.S. killing of a top Iranian general, Qassem Suleimani.

The peso ended 2019 up 3.64%, at 18.9250 per dollar. The bulk of the gains came late in the year, with the peso rising 3.26% in December alone after long awaited changes to the USMCA were agreed on by Mexico, Canada and the United States.

“While the uncertainty towards the trade relationship has diminished a bit, we would not rule out more noise against Mexico on issues of immigration or security,” BBVA said in a note sent to clients.

Trump has made immigration enforcement a major focus of his first term in office and has continued to press the issue in the run-up to the presidential election.

In late May, Trump threatened to slap tariffs on all Mexican exports if President Andres Manuel Lopez Obrador did not curb a surge in migrants trying to cross the U.S. border from Mexico.

Lopez Obrador agreed to send National Guard troops to Mexico’s northern and southern borders to stem the flow.

The consensus among economists is that the peso will weaken in 2020, but the question is how much.

The peso is seen at 20 per dollar at the end of 2020, according to the median of a central bank survey, with readings ranging between 19.20 and 20.50. That is an average depreciation of almost 6% compared to the end of 2019. (Reporting by Abraham Gonzalez; Writing by Anthony Esposito)