by Eli Wright
During the months that began with Donald Trump as one of a pack of Republican hopefuls looking to become the GOP's presidential nominee, through his ascendancy to the US's highest office this past Friday, there has been, perhaps, no bigger nor more frequent whipping boy in the Trump arsenal than Mexico. In Mr. Trump's view the US's southern neighbor is guilty of a variety of high crimes: stealing American manufacturing jobs via cheaper labor south of the border; acting as a base from which illegal immigrants have flooded the US in order to gain access to its superior health care, schools and of course better paying jobs—all of which take complete advantage of US taxpayers in the new President's view.
As President, one of Trump's initial protectionist positions will surely be the renegotiation of the North American Free Trade Agreement (NAFTA). During the course of his campaign he's also vowed to have the Mexican government pay for a wall along the U.S.-Mexican border that will stanch the immigration flow.
At the heart of all this scapegoating, there's been one steady barometer with which to measure first, Trump's presidential chances and now the probability of his positions becoming reality: the US dollar/Mexican peso exchange rate.
Throughout the election period, the Mexican peso was an FX market election gauge, falling whenever it seemed Trump's chances of victory were increasing, rising when it appeared Hillary Clinton might win. After the election results were announced on November 8, USD/MXN jumped from MXN 18 to 20.7 within three days, a more than 12% loss for the peso.
After that, until January 3 when Trump threatened General Motors (NYSE:GM) with a "big border tax" if they built a manufacturing facility in Mexico for compact cars that would be sold in the US, the peso traded within a narrow band, between 20.11 and 20.8. That same day, after Ford (NYSE:F) cancelled plans for its still-to-be-built $1.6 billion plant in in San Luis Potosi, Mexico, the peso dropped approximately three percent over a two-day period, to 21.4.
Less than a week later, on January 9, after Fiat Chrysler (NYSE:FCAU) pledged to invest more than a $1-billion dollars in US manufacturing in order to add 2,000 new jobs in the States, the peso plummeted an additional three percent over the following three days, to 21.85.
USD/MXN was at nearly 22—an all-time low—at the start of trading this past Friday, US Inauguration Day. Ironically, because of US dollar weakness, the peso was one of the best performing global currencies as Trump was sworn in, though eventually settling at 21.59.
This morning though, it breached the strong support set during the previous nine sessions, and is now trading a bit higher, at 21.4218.
The peso is extremely sensitive to the Trumpian rhetoric coming out of Washington. However, if the new US President manages to also weaken the USD as he aims to 'Make America Great Again,' there may be a letup in the peso’s downward trajectory. If Washington softens its tone in the coming days, the peso could strengthen to the 20.7 level, with the next important line of support at 20.