(Bloomberg) -- The Mexican peso's hard crash after Donald Trump was elected president came as no surprise given his campaign's anti-trade and anti-immigration rhetoric.
What few could have predicted was the currency going from being the worst performer following his victory to the best after his inauguration. Since the day before he took office, the peso has rallied 10 percent, twice as much as the No.2 major currency.
The bounce was initially technical. Traders spotted an overreaction after the ballot-box results and began unwinding their bets for further declines. Then the central bank signaled its willingness to auction billions of dollars in foreign-exchange hedges to support the currency. More recently, the driver has been the Trump administration itself, particularly comments from Treasury Secretary Steven Mnuchin in which he outlined a vision for trade that would make winners of both the U.S. and Mexico. That was a long way from Trump's campaign pledge to slap a 35 percent import tax on companies that moved operations across the border.
"What we're seeing is the currency reacting to a lower probability of an extreme renegotiation on Nafta," said Gerardo Rodriguez, a former deputy finance minister in Mexico who now manages emerging-market stocks and bonds for BlackRock Inc. "The chances of a very negative result with tariffs or the end of free trade has decreased."
One-month implied volatility in the peso, a measure of traders' expectations for price swings, has dropped more than 20 percent since the inauguration, the most among major currencies. The peso slipped 0.2 percent Tuesday to 19.96 per dollar at 9:34 a.m. in New York.
Mnuchin's comments on Feb. 23 were seen as positive for Mexico in the near-term by toning down the hostility, but it's highly likely that trade deals will eventually change for the worse, according to Alvise Marino, a strategist at Credit Suisse Group AG in New York. Marino sees the peso gaining to 19 per dollar by mid-May before sinking to 22 by February next year. The softer Nafta rhetoric “doesn't alter the risks for the long-term," he said.
And peso watchers got a reminder Monday that there's still no small amount of tension between the countries. Mexico's top trade negotiator said his country will walk away from talks to renegotiate Nafta if the U.S. insists on slapping duties or quotas on any products from south of the border. By saying he refuses to even discuss the kind of tariffs Trump has long trumpeted, Mexican Economy Minister Ildefonso Guajardo is turning up the pressure on U.S. negotiators and effectively daring them to pull out of the 23-year-old pact.
The longer it takes for the Trump administration to take firm action on Mexican exports, the better it has been for the peso, according to Alberto Ramos, the chief Latin America economist at Goldman Sachs Group Inc.
"As time goes by and nothing happens, it increases the probability that we move into a scenario where trade issues will be settled in a more compromising way rather than through aggressive unilateral action," Ramos said. "That's the reason why the peso has traded well. It was also previously trading at a distressed level, and from that level it's easy to rally."
To contact the reporters on this story: Eric Martin in Mexico City at emartin21@bloomberg.net, Isabella Cota in Mexico City at icota@bloomberg.net.
To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Jeremy Herron at jherron8@bloomberg.net, Rita Nazareth at rnazareth@bloomberg.net, Brendan Walsh
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