Mexico’s peso plunged to a record low on Tuesday night as US Republican presidential candidate Donald Trump led in the key battleground state of Florida and had an edge in a clutch of other states, increasing his chances of winning the election. Concerns of a Trump victory have weighed heavily on the peso for months on his threats to rip up a free trade agreement with Mexico and tax money sent home by migrants to pay for building a wall on the southern US border.
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The peso weakened by more than 10 per cent in Tuesday after-market trading for Mexico and in Wednesday trading in Asia, breaking past 20 pesos per dollar – its biggest intraday fall in at least 19 years. Earlier on Tuesday, the Mexican currency had rallied nearly 1.4 per cent before official election results began to be released, as final polls showed a Clinton advantage.
The market had priced in a Clinton victory, but traders said the currency would be volatile until there are more conclusive results.
In the run-up to the election, Mexico’s peso oscillated wildly, slumping when Trump’s chances of winning improved and rallying when Clinton took the lead in polls.
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Measures of peso volatility, or bets on potential swings in the currency, spiked to their highest levels since the financial crisis, while the volume of wagers in peso futures contracts surged to a record high during the last 50 days.
“This is truly a historic moment. I don’t recall such an extreme outlook on the US economy that could be so negative to the Mexican economy,” said Benito Berber, an analyst at Nomura in New York.
“You have to go back to when the United States took half of Mexico’s territory” to find such a moment when U.S. politics had such a potential impact on Mexico, he added.
Berber said a Trump win could drive the peso to between 23 and 26 per dollar.
A Trump-inspired peso tumble could push Mexico’s central bank to raise interest rates or directly intervene in forex markets.
There could be a bigger-than-expected rally in the peso as funds that hold peso debt or companies operating in Mexico unwind bets they made in the derivatives market as protection from the risk of a Trump upset. Implied volatility in one-week peso-dollar options contracts surged to the highest level since the financial crisis ahead of the election, although levels dipped this week.
Daily volume in the front-month future peso contract has averaged more than 61,000 contracts over the last 50 days, nearly three times the historic mean of around 23,000.
Major banks told clients to expect volatile currency markets in the aftermath of the U.S. election. One Goldman Sachs client said the bank advised on Monday it would not accept new stop-loss orders on the peso until further notice.
A deep slump in the peso could stoke inflation, but it would also help compensate exporters, who could face new tariffs under a Trump presidency. Mexican central bank head Agustin Carstens last week said the country was ready in case of an “adverse” result in the US election, which he has said could hit Mexico like a “hurricane.”