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U.S. Election and Mexican Peso Volatility
But when it comes to world markets, the U.S. election can be a wild card, and nowhere is that more evident than in the currency market, particularly the Mexican peso. Traders brace for event with possible peso volatility as results of U.S. election approach. Any political shift in Washington, however, could have major ripple effects on Mexico’s currency because of the close economic ties between the U.S. and Mexico. The peso becomes a currency trader’s spot on which to focus as they prepare for big moves.
Historical Impact of U.S. Elections on the Peso
Through the years the peso has been particularly sensitive to U.S. elections. For instance, in 2016, the peso fell more than 10 percent on Donald Trump’s surprise victory. A wave of uncertainty was created for Mexico’s economy as he promised to renegotiate trade deals — especially NAFTA — and tighten his immigration policies. That could play out the same way this time if the election goes one way or the other. Past elections are remembered by traders of the peso’s sharp moves, and they are getting ready for a repeat.
Key Concerns for Currency Traders
Several factors are circulating in the minds of traders as they ponder the peso’s future. As is trade relations between Mexico and the U.S. Mexico’s economy and peso could be hit, and therefore there could even be a change to trade agreements that would cause changes in tariffs, or regulations. U.S. immigration policies are a concern, too. Remittances sent back to Mexico from immigrants in the United States, is an important source of income for the country, and could be reduced by stricter immigration laws. The U.S. also has its own programs of economic stimulus. The U.S. implementing stimulus plans will help boost the peso if other nations invest in Mexico.
Possible Scenarios After the Election
The outcome of the election is stirring currency traders into different scenarios. For example, a Republican victory is usually thought to result in leaner trade and immigration policies, which may force the peso. But a Democratic win is likely to be followed by softer trade policies that could bolster the peso. But any immediate effect could be different from bigger picture trends: policy changes, for example, generally occur only slowly.
The Role of the Federal Reserve
The peso’s value also depends on the role of the U.S. Federal Reserve apart from the election. Raising interest rates to crack down on U.S. inflation – and by extension inflation globally – will see the U.S. dollar strengthen, which will put pressure on the peso. During high U.S. inflation, investors may also shy away from investing in the peso and seek out safe assets like the dollar, further driving down the peso. The future of the peso therefore lies as much in the Federal Reserve’s decisions as it does in whether the peso is likely to face ‘conditions of hyperinflation and disruption’.
Trader Strategies for Handling Volatility
The volatility anticipation is not sitting idle for the traders. Many strategies to protect themselves from a sudden exchange rate movement in the peso are being used by many. The ordinary way to hedge risk is to use financial instruments such as options. Not all are betting on the peso rising, some are taking short positions and hoping in the short term that the peso will decline. Some are watching election news, polls, and economic announcements more too, to decide with more clarity.
In the coming weeks, it will largely be tune dependent on how the election rolls during. All of these will be affected by immediate policy announcements, shifts in U.S.-Mexico trade relations and changes in U.S. monetary policy. These factors are a risk as well as an opportunity to the traders. The currency markets are braced for what could be big changes, it is a time of high alert in the markets.
Conclusion
As we approach the U.S. election, however, the Mexican peso is back in the spotlight. Given that the peso is still vulnerable to shifts in U.S. political and economic policies, it’s a good one to watch. Using risk management strategies and keeping abreast of the latest developments currency traders are bracing themselves for sharp moves. How the election and its immediate aftermath will play out will be hugely important for the peso’s future trajectory.
