On November 9th, 2016 the Mexican Peso dropped to the lowest levels it had traded before against the United States dollar - a stunning 11%. $1 was worth just more than 20 pesos on the morning of November 10th. Now this turn of events was of course related to the shocking electoral victory of the United States' 45th President - Donald J. Trump. The tough rhetoric from the GOP frontrunner on immigration, border safety, tariffs, and drugs targeted towards Mexico in a relentless campaign leading up to his victory all but ensured an undermining of the value of the Mexican Peso.
However, in the months following the inauguration of President Trump something strange started to happen. Since the day before he took office, the Peso has rallied 10 percent, twice as much as the No.2 major currency in that timeframe. The immediate terror Trump had associated with Mexico seems to fade by the day as hope for more amicable talks start to take shape.
Alberto Ramos, the chief Latin America economist at Goldman Sachs Group Inc. was quoted as saying "As time goes by and nothing happens, it increases the probability that we move into a scenario where trade issues will be settled in a more compromising way rather than through aggressive unilateral action, that’s the reason why the peso has traded well. It was also previously trading at a distressed level, and from that level it’s easy to rally."
Mr. Ramos made that quote on Feb 20th and his words have continued to ring true.
The graph shown above is the of the currency pair USD/MXN or the United States Dollar to the Mexican Peso since the beginning of 2017. Since USD is the quote currency you can see how it has steadily been going down in value as the Peso appreciates in value. The largest concern the Mexican government and economy had during Trump's campaign on Mexico was his insistence on overhauling or even ending the NAFTA agreement. For a perspective on the monetary impact of the NATFA agreement with Mexico it is noted that as of 2014, U.S. foreign direct investment (FDI) in Mexico rose to more than $107.8 billion up from $15 billion when the agreement was originally signed in 1993 by then President Bill Clinton. U.S. goods imports from Mexico also totaled $295 billion in 2015, up 0.2% ($667 million) from 2014, and up 73% from 2005. In total, U.S. goods and services traded with Mexico totaled an estimated $583.6 billion in 2015.
Although the tough talk from the Trump Administration on border control and immigration issues still are front and center it seems for now there's a softening stance on hastily uprooting the current NAFTA agreement in any threatening manner. As March concludes, the Peso is headed for its largest monthly rise in 5 years as signs the Trump agenda is beginning to falter in the midst of the administration's defeat on the healthcare reform bill late on March 24th.
Mexico's central bank, which jacked up interest rates to help defend the currency from a Trump-related fallout, has signaled its willingness to let the currency appreciate further despite the fact that this could put the country’s manufacturers at a comparative disadvantage.
Bank of Mexico Gov. Augustin Carstens even said earlier this week that the currency remains undervalued by roughly 10%. So for the forex traders, sell the USD/MXN pair? We shall see, but that strategy has definitely paid off so far.
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