(Bloomberg) -- For Mexico’s currency, 2017 was a tale of two halves. After rebounding from a Trump-sized crater through July, the peso slumped -- although not quite enough to erase what turned out to be its first annual gain in five years. More Nafta jitters and a presidential election mean next year might be just as volatile.
The fate of Nafta, covering $1 trillion of trade between the U.S., Canada and Mexico, have weighed on the peso since Donald Trump took office. And July brings an election in which leftist candidate Andres Manuel Lopez Obrador looks likely to unseat Mexico’s scandal-ridden ruling PRI party.
"A lot of the peso’s gain was a correction of the over-pessimism in the past," said Danny Fang, an analyst at BBVA (MC:BBVA) in New York. "For the first quarter of 2018, we can expect the MXN to remain sensitive to new rounds of political noise, with the electoral process and Nafta negotiations being the main drivers."
The peso sank nearly 14 percent immediately after the November 2016 victory by Trump, who threatened during his campaign to pull out of the trade pact. But then it quickly climbed, posting the best performance among emerging market currencies tracked by Bloomberg in the first quarter. Though the rally faltered by mid-year, the peso still ended 2017 up 5.4 percent, lagging only the Chilean peso’s 8.9 percent gain among Latin American currencies. An increasingly hawkish central bank could help push the peso higher next year.
Yet investors remain wary. Yield spreads between local and hard-currency bonds are at a six-year high as investors hedge against currency risk. As pressure builds ahead of the election, it remains to be seen whether the currency can repeat the performance next year.