Mexico’s peso plunged to its lowest-ever levels on Tuesday night as US Republican Donald Trump led in the key battleground state of Florida and had an edge in a clutch of other states, driving investors to contemplate that Trump could likely be the next US president.
Concerns of a Trump victory 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.
The peso weakened by more than 13 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.
“There’s a lot of panic in the market, it is definitely an outcome it was not expecting,” said Juan Carlos Alderete, a strategist at Banorte-IXE. “The movements are very strong, the market is showing higher risk aversion in search of safe-haven assets.”
A Trump-inspired peso tumble could push Mexico’s central bank to raise interest rates or directly intervene in forex markets to stem the bleed.
Three economists told Reuters they expected Mexico’s central bank to raise its benchmark interest rate by an impromptu 75 to 150 basis points on Wednesday if Trump wins, while one of them said the bank could instead opt for a swap with the US Federal Reserve pending how the peso evolves.
The central bank has already hiked its rate three times this year, lifting it to 4.75 per cent to anchor inflation expectations following a sharp depreciation of the peso.
“I don't think a Trump scenario was taken seriously in the last days by the market. Hopefully there are some contingency plans by authorities and they can take measures to protect the Mexican economy,” said Ernesto Revilla, an economist at Banamex and the government's former chief economist.
Mexican central bank head Agustin Carstens had 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’’.
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.
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.
Berber said a Trump win could drive the peso to between 23 and 26 per dollar.
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.