The “Super Mexican Peso”; in the Second Trump´s Era

April 29, 2024

In 2024, Mexico’s economic scenario will face local elections, and in parallel the electoral period in the United States. For investors, the elections in the USA will generate greater concern since Donald Trump could achieve his second term as president. To measure its possible effects, we will focus on the economic variable, that will reflect volatility in these elections, the Mexican Peso exchange rate. The “Trump” effect on the exchange rate is remembered in 3 stages: High volatility in the face of trade uncertainty; a stabilization period with ups and downs; and the onset of the Covid-19 pandemic. As we remember, Trump was known for making trade attacks on various countries, mainly China, Mexico, and sometimes Europe.

In Trump’s past administration (2017-2021), the USD/MXN (dollar/peso) experienced 5 major periods of depreciation, which considered on average a weakening of the peso of 15.0%. In contrast, observed 3 periods of appreciation, which on average contemplate a strengthening of the weight of 13.1%. Some interesting data from that period are the following: 1) An average of USD/MXN of $18.07 in the first half of 2016, before the Trump administration, but with high volatility in the second half of the year; and 2) A dollar and average exchange rate during the Trump administration of $96.2 and $19.01, with the effect of Covid-19 of $95.20 and $19.52 respectively. The statistics do not consider the beginning of the Covid-19 pandemic, an aspect that implied a depreciation of 31.8% compared to the average USD/MXN observed between July 2018-January 2020 (the maximum value of the peso in that context was 25.4 dollars/peso). From our perspective, the ratification of the USMCA was key to finding the appreciation effect of the peso.

Although the country leads in terms of imports made by the U.S. and a great momentum for nearshoring, we see the following risks if Trump materializes his second presidential period: 1) Retaliation and possible sanctions, since recent news indicates that China is avoiding tariffs by installing manufacturing processes and sending products to the US from Mexico (example: in 2023, Chinese automakers with operations in Mexico sent spare parts to the U.S. in the amount of $1,100 million dollars); 2) due to the previous context, Mexico would stop taking advantage of the import of goods that would result from the new trade tension between the US and China, leaving more space for Asian countries; 3) pressure for steel/aluminum triangulation, as the U.S. Trade Representative accused Mexico of the lack of transparency in information on Mexico’s imports from third countries; 4) Questioning the first revision of the USMCA in 2026, recalling that Trump could talk about a new renegotiation due to the context of China; and 5) migration factor, remembering that this year the border areas will be visited, and now Trump could take new measures after Canada’s recent imposition on a Visa.

We consider it appropriate to evaluate the peso exchange rate scenario under two fundamental premises, our perspective on monetary policy and the Trump Effect based on our statistical analysis. That said, we visualize two main scenarios: the 2024 baseline scenario and scenario 2 “Changes in Vision plus the Trump Effect”. These scenarios leave out factors that could add to greater volatility (such as new geopolitical escalations in other regions). So far in 2024, the dollar index has appreciated by 3.5%, however, the peso has shown an appreciation of close to 1.9%. It should be noted that the exchange rate is influenced by many factors, and our exercise only considers historical aspects of what is already known because we perceive a different economic environment and a positive perception of Mexico.

Our base scenario considers monetary policy adjustments in Mexico and the U.S. This scenario considers Mexico´s Central bank (Banxico) with its first move in March and the FED in June or July, with the main adjustments in the second half of 2024. We would expect a level of $17.80 by the end of the year, which would imply a depreciation of 4.2% compared to the current level. The key, in this scenario, will be that there are no radical changes in the inflationary environment.

For the second scenario, we would expect the FED and Banxico to be more restrictive. Both central banks are concerned about the trajectory of inflation both made revisions for this year, so inflation could pick up somewhat, and therefore, an adjustment to the current environment. In addition to this context, we are incorporating statistical volatility for Trump, remembering that eventually, the “aggressive” comments could materialize. In other words, we are only incorporating half of the depreciation effect that was observed in the Trump era, to measure a theoretical picture of what it might imply. In this context, we would expect a level of $18.50 by the end of the year, which would imply a depreciation of 8.2%.

Considering the strength of the Mexican peso at the start of 2024, 30.0% of the volatility (depreciation) period has been ruled out, that is, the effects that Trump’s comments would have already implied in these months. We do not rule out a more aggressive escalation by Trump towards Mexico, but without perceiving structural changes so far, since it is difficult to assume that the same history will repeat itself. In the view of betting on speculative positions on the peso in Chicago, the view of greater appreciation of the peso in the short term is maintained, an aspect that strengthens the little correlation with the dollar index.

Although at the start of 2024, specifically in the first quarter of the year, there is an environment of some calm due to the elections in the U.S., the probability of new periods of volatility would occur from the end of the first half to the end of the year. It is good to mention that there is no predictability of the peso exchange rate, however, recent history provides us with statistical opportunities to generate dimensions of what could be faced going forward. That said, it is advisable to develop a strategic plan for exchange rate hedging and evaluate alternatives that support Mexico’s export and import sector.

By Janneth Quiroz, Roberto Solano and André Maurin, MONEX.