Donald Trump's rhetoric may be spooking investors, hurting Mexico's peso. Photo: Getty
Donald Trump’s rhetoric may be spooking investors, hurting Mexico’s peso. Photo: Getty

The Mexican peso has fallen to a three-month low against the dollar. It is the world’s worst performing major emerging markets currency this year.

Analysts offer many conventional reasons for the peso’s decline, but the Wall Street Journal’s Moneybeat column suggests something else. Donald Trump’s harsh rhetoric.

Mexico’s economy grew more than expected in the first quarter,and all-important oil prices have soared nearly 90% after hitting bottom earlier this year.

So why the currency decline?

The U.S. presidential election is just five months away, and the Republican’s presumptive nominee has threatened, among other things, to block remittances from undocumented Mexican workers in the U.S. Trump has berated Ford, Nabisco and Carrier for moving factories to Mexico, and has threatened to “play” with America’s $58 billion traded deficit to Mexico if it did not ante up between $5 and $10 billion for a border wall.

The peso continues to slide against the dollar. Photo: Getty
The peso continues to slide against the dollar. Photo: Getty

So maybe cautious investors are backing away from Mexico’s currency, said Win Thin, a strategist at Brown Brothers Harriman.

“There has been chatter to that effect. Certainly, his stance on Mexico is pretty negative,” Thin told the Wall Street Journal.

Hedging risk

Another phenomenon may also be at work. The peso’s liquidity makes it a target for investors looking to bet against emerging markets. Foreign investors tend to use the currency to hedge the risk of holding peso-denominated debt, because they are optimistic about the country’s economy and are happy owning Mexican bonds.

Those factors have contributed to years of disappointing performance for the Mexican currency, despite recommendations by Wall Street analysts and endorsements from bond investor Bill Gross.

Mr. Trump’s effects on the market are likely to become clearer in coming weeks, after investors deal with the Federal Reserve meeting on June 14 and 15, followed by a June 23 British vote on whether or not to leave the European Union. It’s then that investors are likely to focus more on the presidential race.

When that time comes, markets may be in for a wild ride.

“Very few people have a solid understanding of what changes Mr. Trump might actually make,” said Jason Bloom, Invesco PowerShares director of commodity and alternatives research. “He’s such a wildcard, you just don’t know how to set up for it.”

 

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