Be careful about a weak Mexican peso

The Trump-Mexico hysterical sideshow has a new episode.  They are now talking about Mr. Trump and the Mexican peso.  Some people are seeing a connection between better Trump polls and a decline in the value of the peso.

It was first brought to my attention at Fausta's Blog.  Now Eric Martin at Bloomberg is also writing about it:

Polls? Who needs ’em.

If you want to know how Donald Trump is doing, all you need to do is check the Mexican peso.

Over the past four months, Mexico’s currency has repeatedly declined when Trump’s election outlook improves and rallied when his odds of winning slump.

The peso tumbled to a 2 1/2-month low Monday after his Democratic rival, Hillary Clinton, canceled a two-day trip to California because she’s suffering from pneumonia.

The presidential campaign has kept Juan Carlos Alderete busy. The 32-year-old head of currency strategy for Grupo Financiero Banorte SAB in Mexico City said phone calls from clients such as pension and mutual funds jumped 50 percent in July, when Trump improved his showing in predictive models like FiveThirtyEight during the Republican and Democratic conventions. 

Alderete has become a U.S. political junkie, closely following the daily movements and speeches of the two candidates -- particularly the one who pledges to end or overhaul Nafta and make Mexico pay for a $10 billion border wall.

For the record, no one was more anti-NAFTA than then-senator Obama in 2008, and it had zero impact on the Mexico peso.  Remember when they sent Obama campaign representatives to visit with the Canadian government to calm them down?     

Let me add a couple of thoughts about the Mexican peso.

First, devaluations are chaotic, and we see the consequences up here.  I was living in Mexico City in 1982 working for a U.S. bank when the peso went from 27 to 72 in one morning.  It was panic like I've never seen before.  We had Mexican clients on the phone wondering how they were going to pay their dollar-denominated loans.  We had U.S. citizens on the other line wondering about their "mex-dólares," or their investments in Mexico.  The merchants were changing their prices to reflect the new peso vs. dollars.  Even the fellow who came in the office to shine our shoes was aware of the devaluation and wondering how it'd impact his business.  It was chaos the likes of which I've never seen before.   

Things were so crazy that year that Paul McCartney wrote a song about the world's currencies: "The Pound Is Sinking."  From the collapse of the Argentine peso to the devaluation in Mexico of August 1982, a pop song by the former Beatle was one way of dealing with it.

The peso was also devalued in 1994, and I would argue that it set off much of the illegal immigration we saw subsequently.  My point is that peso volatility does not help anyone, specifically a future President Trump dealing with the chaos it always brings.

Second, I don't think the current peso unease has anything to do with Trump.  Back in February 2016, or around the time of New Hampshire's primaries, there were already signs of a weak peso.  I specifically saved this article and forward it to some friends in Mexico:

The Mexican peso’s exchange rate to the U.S. dollar, which has normally traded at 12:1, recently jumped to 19:1, putting a serious pinch on Mexicans’ wallets. For Mexicans, the widening exchange rate means it has suddenly become nearly twice as expensive to travel to the U.S. or buy U.S. goods.

As a result, currency exchange rates and inflation have strangely become the talk of the town — and not just among economists, but all Mexicans. Young people especially are slamming the government for trying to downplay the effects of depreciating currency on their daily lives.

Is the Mexican peso a poll about the U.S. election?  I don't think so.  It is a statement on concerns about the Mexican economy, such as low oil prices.  It is also about exports and having a peso that helps Mexican exporters.  That was the consensus of an economic summary I read a few months ago.

Trump causing a weakening of the Mexico peso?  I don't think so, and I pray that it is not so.  Mexico has been floating its peso since the late 1990s, and it's been good for both sides.  Again, I saw a Mexican peso devaluation firsthand, and it was not fun, even if I went out that weekend and bought some nice business suits suddenly cheaper in dollars!

P.S. You can listen to my show (Canto Talk) and follow me on Twitter.

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