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Mexico’s peso slump leaves currency experts unnerved as Trump uncertainty takes hold

Susana Gonzalez | Bloomberg | Getty Images

A further fall in the price of the Mexican peso Thursday has left market participants cautious on where the currency could be heading next, with new policy announcements by the Trump administration adding to a high level of political uncertainty.

"We see MXN (the Mexican peso) at 20-21 (per dollar) throughout the year. While we still see a possibility of MXN trading at 25-28, we now think there are too many uncertainties to have a strong conviction about strong depreciation or appreciation," Nomura said in a note on Friday.

"Mexico is one of the EM (emerging market) countries most exposed to the Trump administration's likely protectionist policies," Nomura added.

NAFTA renegotiation?

Mexico's peso has lost 2.4 percent of its value against the dollar since the start of the year on President Donald Trump's protectionist approach. The new American president signed off orders this week to build a wall on the border between the two countries. On Thursday, the floating of an idea by Trump's team to tax Mexican products to pay for the wall caused another major move lower for the peso. The currency was trading at 21.2378 against the dollar at around 11.00 a.m. London time on Friday morning.

The relationship between Mexico and the U.S. has significantly deteriorated since the election of Donald Trump. President Enrique Pena Nieto of Mexico cancelled a trip to the U.S. next week as Trump intensifies his threats that the Mexican government has to pay for the border wall.

Trump has also promised to renegotiate NAFTA – a trade agreement between the U.S., Canada and Mexico, although Nomura analysts suggested that this threat "is unlikely to fully materialize."

"This is the challenge we face now in this world with politics and twitter politics," Dominic Bunning, forex strategist at HSBC, told CNBC on Friday.

"There's no real set policy in the U.S. so the markets are trying to react, are trying to price in where the peso should trade in this environment, should it price in a full 20 percent tax, maybe it should price in just a 10 percent tax, we just don't know," Bunning said.

Growth downgrade

Amid such uncertainty and the worsening of the U.S.-Mexican relationship, investors have stopped looking at Mexican credit as a long term safe option.

"Mexican credit has been the safe play for the last three years," Nathaniel Rosenbaum, credit strategist at Wells Fargo, told CNBC on Friday adding that this is now being reconsidered.

"Most investors up until the election were quite long on Mexico credit and then obviously the election surprised many people and therefore at this point I think investors are really questioning the being long on Mexico on the credit side," Rosenbaum noted.

"You think about the implications of this, essentially if the objective of the administration was to reduce the trade deficit they would be focusing on China and not Mexico. China's trade deficit with the U.S. is five times larger than that of Mexico," he said.

According to Nomura, Mexico's economic outlook is set to worsen. Before Trump was elected, the bank forecast 2.5 percent growth for 2017, but it has now been revised to 1.7 percent.