us and mexican currency Peso under pressure from NAFTA, elections

22 pesos to the US dollar? It’s a possibility due to NAFTA uncertainty

Peso's value has been trending downward for five weeks

The Mexican peso could trade at up to 22 to the U.S. dollar between now and the July 1 presidential election due to continuing uncertainty over the outcome of negotiations to update the North American Free Trade Agreement (NAFTA), according to analysts.

The slow-moving trilateral talks are already placing significant pressure on the currency, with the dollar selling for 20.20 pesos at Citibanamex yesterday.

That price is the highest the dollar has been since March 2017 and is the result of a downward trend for the peso that has continued for five consecutive weeks. On wholesale foreign exchange markets, the currency closed the week trading at 19.95 pesos to the dollar.

In addition to NAFTA uncertainty, the news agency Bloomberg said that presidential candidate Andrés Manuel López Obrador’s commanding lead in opinion polls has also contributed to the 8.7% drop in the peso’s value against the U.S. dollar since the end of the first quarter.

The prediction for 22 pesos to the dollar comes from two high-ranking officials at two different business groups.

The head of industrial promotion for the National Chamber for Industrial Transformation (Canacintra) told the newspaper El Universal that if NAFTA renegotiations continue to drag on in the coming months, he expected that the exchange rate would maintain an average of 21 pesos to the dollar.

However, if the United States remains inflexible in the demands it is pushing for, Juan Manuel Chaparro said, the dollar could hit 22 pesos, with part of the uptick “arising from the results of the upcoming elections.”

José Luis de la Cruz, the general director of the Institute for Industrial Development and Economic Growth (Idic), told El Universal that “if [NAFTA] uncertainty continues and there’s not a clear message that the negotiation is going to continue . . . the exchange rate could reach 21 pesos to the dollar.”

The Idic director added that in an extreme scenario the dollar could sell at 22 pesos, citing the possibility of United States President Donald Trump following through with threats he has made to terminate the 24-year-old deal, and the introduction of tariffs on Mexican metal exports to the U.S. on June 1.

While not citing the 22-peso figure, strategists for financial multinational Morgan Stanley wrote in a note yesterday that the peso could lose 10% of its value if the trade deal is terminated.

On the other hand, if a new pact is agreed to and signed this year, the strategists anticipated a 5% jump in the peso’s value.

“FX [foreign exchange] is the main shock absorber for any change to the NAFTA policy framework or to expectations,” the note said.

The strategists also said that Mexican equities may gain 2% if a deal is reached but if NAFTA is terminated, share values could drop by as much as 19%.

Two other analysts consulted by El Universal predicted a more favorable outlook for the peso.

Juan Carlos Alderete Macal, a senior foreign exchange strategist for Banorte, said that he sees the peso ending May at 19.80 pesos to the U.S. dollar before reaching a slightly better exchange rate of 19.50 in June.

Alderete made his prediction despite taking into account comments from United States Trade Representative Robert Lighthizer, who said Thursday that “there are lots of issues to be resolved” and that the three countries are “nowhere near” a deal.

“That creates greater uncertainty about who will be in charge of the negotiation in the case that it extends a lot longer, and there is a transition [of power in Mexico and the United States], and what the position of both parties will be,” Alderete said.

If a new NAFTA deal is negotiated and interest rates in the United States remain steady, a rate of 18 pesos to the dollar is possible between now and the presidential election, said the general director of the Center for Private Sector Economic Studies (CEESP), Luis Foncerrada Pascal.

However, judging by Lighthizer’s remarks, the former outcome would seem unlikely.

Mexico Economy Secretary Ildefonso Guajardo, however, was more optimistic, saying that with “creativity and flexibility” the still unresolved issues could be dealt with quickly.

“There are lots of issues to be resolved, but they’re issues of ‘yes and no’ and don’t need technical sophistication,” he told reporters. “It’s an issue of having the political will.”

Guajardo, Lighthizer and Canadian Foreign Minister Chrystia Freeland met in Washington D.C. last week amid increased pressure to reach a deal because of a United States congressional deadline and the upcoming Mexican elections.

Negotiations between the respective technical negotiating teams continued in the United States capital this week.

However, the May 17 cut-off set by U.S. House Speaker Paul Ryan to give the U.S. Congress a chance to pass a new agreement was missed and Mexicans will go to the polls in just six weeks.

Among the issues that the three countries still need to reach consensus on in order for a new deal to be struck are rules of origin for the automotive sector, Mexican wage levels in the same sector and proposed changes to a dispute settlement mechanism.

Source: El Universal (sp), Bloomberg (sp), Reuters (en)

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