The peso has dropped to its lowestvalue ever versus the dollar, reflecting fears that Mexico’s economy will come under threat from Donald Trump’s new trade policies (tweet this) when he enters the White House…
What does this mean?
There’s no mystery behind the peso’s big fall: aggressive rhetoric from President-elect Trump concerning higher taxes on imports (a.k.a. tariffs) from Mexico has caused international investors to move money out of the country. The thinking is that demand for pesos (to pay for expenses like building a factory in Mexico) will decline sharply as US manufacturers, like Ford, scrap expansion plans in Mexico in favor of US production.
Why should I care?
The bigger picture: Higher trade barriers typically lead to higher prices for consumers. If Ford and other US manufacturers are incentivized to move production to the US from a country where they can make products for a lower cost (like Mexico), it’s likely that those products will increase in price for American consumers.
For markets: Investors in “emerging markets” face significant risks due to often volatile currencies. International investors in Mexican stocks and, especially, bonds are facing some serious losses when their returns are measured in their home currencies (due to the drop in the peso). The situation is not so different in Turkey and Egypt, where the value of the currencies have also fallen sharply (although for very different reasons). So far this year, some other emerging markets have been performing well, but the experience of the peso certainly highlights the risk that falling currencies can pose to investors in emerging markets.
Originally posted as part of the Finimize daily email.
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