Volatility of Mexican peso likely to worsen in 2018

Significance

The peso is depreciating sharply due to renewed uncertainty surrounding the North American Free Trade Agreement (NAFTA). Further volatility may be caused by an acrimonious and uncertain Mexican presidential campaign in 2018. Although macroeconomic fundamentals are solid, the government will need to adopt stabilisation measures in order to stem a loss of investor confidence. So far however, there are no signs that such actions are being considered.

Impacts

• Banxico is unlikely to sell international reserves to stabilise the peso, given the past failure of that strategy.
• Depreciation may increase inflationary expectations and push Banxico to tighten monetary policy, constraining growth in 2018.
• The appointment of Foreign Minister Luis Videgaray as Banxico governor would be viewed negatively by the markets.
• US monetary tightening will narrow the premium Mexico enjoys over US rates, potentially constraining investment into Mexico.