The Mexican peso has been clobbered since even before Trump got elected. That’s not good for companies with debt denominated in dollars who receive most of their revenues in pesos. From Don Quijones at wolfstreet.com:
Peso crisis could trigger next dollar-debt crisis in Mexico.
Within hours of Trump’s electoral triumph, the Mexican peso, which has become the number-one hedge against a Trump victory, had slumped a staggering 13% to its lowest point in history and its steepest intraday dive since 1994-5, when the Tequila Crisis came within a hair’s breadth of bringing down Mexico’s financial system, and with it some of the biggest names on Wall Street, including Citi and Goldman, before the Federal Reserve, US treasury, IMF, and Bank of International Settlements hastily intervened.
By the end of Wednesday’s trading, it recovered a little to close at 19.84 pesos to the dollar, down 8% for the day. Today, the peso fell another 4%, ending the day at 20.67 to the dollar. A hurricane — as Mexicans are fond of calling Donald Trump — is approaching. Thanks primarily (but not only) to Trump’s march on the White House, the peso has lost 18% of its value against the dollar this year, more than any other major currency except for the pound sterling. But the peso’s current woes began long before Trump announced his intention to run for president.
At the beginning of 2014, it took just over 13 pesos to buy a dollar. Now it takes more than 20. According to some analysts it could soon be 25.
Since Tuesday, Mexico’s monetary authorities have been on red alert but as yet have done nothing to staunch the peso’s decline, largely because there’s embarrassingly little they can actually do, as Mexican Secretary of Finance José Antonio Meade Kuribreña all but conceded just days before the election.
Last year, the Bank of Mexico (endearing known in Mexico as Banxico) tried to slow the stampede out of pesos by selling a small but growing fraction of its dollar reserves in open auctions, but to little avail. Even as the amount under auction rose from $50 million to $200 million, then to $400 million, the peso continued to crumble, until the central bank finally gave up on the costly but futile exercise.
Earlier this year Banxico upped the ante, raising interest rates, twice. But yet again the exchange-rate effects were short lived. That won’t stop the central bank from hiking rates further. If things get really bad, it may even begin auctioning interest-rate swaps, as it did in the wake of the global financial crisis. In the bank’s own words, such an operation is aimed at bolstering credit institutions “by reducing the duration of [their] assets” so they can “operate in a market with higher volatility and rising interest rates.” In layman terms, it’s more free money for the banks.
In 2008, Banxico carried out interest rate swaps with credit institutions for up to 50 billion pesos ($2.5 billion). Back then the swaps may have been enough to avert disaster, but they also coincided with the release of an unprecedented tsunami of newly created money from the Fed.
Conditions are now markedly different. Rather than being starved of cheap credit, the world is drowning in it. Corporate borrowing costs in dollars, euros, and yen have become farcically cheap in recent years, thanks to the rampant interventions of central banks. But as emerging market firms are discovering, it can be a lethal trap. As the peso swoons against the dollar, the dollar-denominated debt held by Mexican corporations with peso-denominated operating income becomes increasingly difficult to service.
To continue reading: Financial “Hurricane” Trump Is Approaching Mexico
