By Robbie Whelan
MEXICO CITY -- Mexico's peso recovered some lost ground on Wednesday morning, but it remained near record lows after a series of wild swings in the aftermath of Donald Trump's surprise victory , fueling uncertainty over the future of bilateral relations and cross-border trade.
In Mexico City, the peso was trading at 19.7988 to the dollar at market close on Wednesday, after plunging close to 12% and hitting an all-time low of 20.7 pesos per dollar in global currency markets early Wednesday morning. The Mexican currency closed at 18.38 to the dollar on Tuesday amid expectations that Hillary Clinton would easily win the presidential race.
At a press conference earlier in the day, Mexican authorities sought to reassure investors that the country's fundamentals were solid enough to withstand rising headwinds. Central Bank chief Agustín Carstens said the bank would hold a scheduled policy meeting next week to decide whether to raise interest rates in response to the market turmoil generated by the election.
The large daily peso turnover of $112 billion makes any extensive dollar sales by the Bank of Mexico unlikely, since it would burn through foreign reserves with no lasting effect on the exchange rate.
"The rebound in the peso over the last few hours appears to have dissuaded Mexico's central bank from raising interest rates at a press conference this morning," the London-based Capital Economics consultancy said in a research note.
However, analysts are predicting that currency volatility could force the Banco de Mexico to fast-track a rate increase at next week's scheduled policy meeting, rather than in December, when most economists expect the U.S. Federal Reserve to also raise rates.
"I think the peso is going to weaken even further and there will be a threat of more inflation coming to Mexico as a result," said Sireen Harajli, foreign-exchange strategist for Mizuho Bank. "The central bank is more likely to hike sooner rather than later just to stabilize the currency a bit and combat volatility."
The peso is a lightning rod for what could be two-pronged thunderbolt: the direct impact that a Trump presidency could have on trade and investment, and the use of the currency by investors to hedge other emerging market exposure.
As the world's 10th most-traded currency by volume, and second among emerging markets behind the Chinese yuan, the peso is often the first sold in bouts of global risk aversion. It also trades around the clock.
"Mexican authorities are well prepared to confront a volatile scenario," said Alonso Cervera, Latin America chief economist for Credit Suisse. "This electoral outcome has been a possibility for some time now, and authorities had time to prepare."
Local equity prices also took a beating on Wednesday, with Mexico's benchmark IPC index losing 1.8% to 47,877.3 as local investors took profits following several sessions of steady gains.
"There may be some uneasy calm for a while, but I don't think the dust has settled," said Win Thin, global head of emerging market currency strategy for Brown Brothers Harriman. "There's obviously much more room for turmoil."
One consolation for the Mexican government is that it has already pre-financed its 2017 foreign debt principal payments with recent issuances of bonds in U.S. dollars and euros.
But since the policy direction from the Trump administration isn't yet clear, "any changes that materially disrupt trade or financial flows would be credit negative for Mexico," Moody's said on Wednesday.
Exports to the U.S. represent over 20% of Mexico's economy, and the country would also be vulnerable to a slowdown in foreign direct investment from the U.S., the credit ratings firm said.
UBS economists see the possibility of gains for the peso and Mexican short-term debt if, as they anticipate, protectionist measures in the U.S. turn out to be less aggressive than many fear.
Write to Robbie Whelan at firstname.lastname@example.org
(END) Dow Jones Newswires
November 09, 2016 18:45 ET (23:45 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.