Originally published by AxiTrader
Donald Trump's rhetoric about building a wall along the US-Mexican border and sending the bill to the Mexican government might have sounded hyperbolic during the election campaign. But it has become clear in recent week's that the president-elect is serious in targeting the two main villains in his narrative of what ails the US economy.
If nothing else is clear about the way the administration will actually govern once in office there is now misunderstanding that Mexico and China are clearly the main sources of the new administration's ire.
The antipathy toward both these nations has been in evidence from Mr trump himself as a candidate and then as president-elect. Equally, his nominees for various cabinet posts have doubled down on China and Mexico in their congressional confirmation hearings.
Last night it was NAFTA, and specifically Mexico, that was called out by Trump's commerce secretary nominee Wilbur Ross.
Ross said "NAFTA is logically is the first thing for us to deal with," adding "we ought to solidify relationships in the best way we can in our territory before we go off to other jurisdictions."
So, while Ross also had a pop at China as the "most protectionist" country among large economies, perhaps China can wait for now while the administration deals with Mexico.
Ross singled out NAFTA and in doing so reinforced comments made by Donald Trump in a BIld interview earlier this week where he specifically warned German carmaker BMW about constructing cars in Mexico. We already know he has been targeting US businesses who were shifting production to the United States southern neighbor. But Trump said “I would tell BMW that if you are building a factory in Mexico and plan to sell cars to the USA, without a 35% tax, then you can forget that”.
So it's no surprise that the Mexican peso is under pressure and continuing to make record lows against the US dollar. (NB: the blue line at the bottom of the chart is Reuters calculation of the USD/MXN 10 year spread.)
At 21.90 the USD/MXN is almost 4 big figures above the post-election low of 18.1475.
But the big question for traders is where the circuit breaker for a halt to the Mexican selling might come from.
Janet Yellen's speech in California certainly wasn't that circuit breaker. Indeed by focusing on the fact that the US economy was "close" to full employment and rates are likely to rise for a number of years Yellen highlight that the US dollar is not only the place to be in developed markets but globally
That's important for the USD/MXN rate because cash rates and economic growth drives bond spreads which are an important driver of many currency pairs. USD/MXN is no exception as the chart below shows.
And with Reuters reporting overnight that its latest poll shows that "Mexico's economy is set to grow at the slowest pace in four years in 2017" the chances of Traders repricing this spread anytime soon seems remote.
"Mexico's economy is expected to grow 1.7 percent in 2017, according to the median of 23 forecasts, down from 2.3 percent in an October poll and after an estimated expansion of 2.0 percent in 2016" Reuters said.
The poll showed that as well as Mexican growth economists have marked down Latin American growth more broadly.
"Peru will probably continue to be the fastest growing economy in Latin America, with an expansion rate of 4.1 percent in 2017, according to the poll. Argentina is likely to resume growth as neighboring Brazil exits a two-year-long recession.
Chile and Colombia are set to grow just around 2 percent though, and Venezuela, mired in a deep political and economic crisis since oil prices plunged, is expected to shrink 3 percent in 2017 after an estimated drop of more than 10 percent in 2016.
Of course, Banxico and its counterparts across the region can raise rates to try to counter the weakness in their currencies. But for now it seems like the Mexican peso will remain under pressure.
Have a great day's trading.