Market Insider

Painful volatility ahead for the Mexican peso

Peso extends gains on news Mexican president spoke to Trump

The Mexican peso looks like it will remain painfully volatile against the dollar.

Fresh headlines on U.S.-Mexico relations sent the peso jumping against the dollar Friday, continuing a trend this week where incremental news sent the Mexican currency up or down more than 1 percent against the greenback.

"The concern here is that anyone who has to make a relevant investment or consumption decision in Mexico right now has to deal with more kinds of uncertainty, which might lead some of these agents to put off their decisions," said Alejo Czerwonko, emerging market strategist at UBS Wealth Management.

"And that doesn't bode well for economic activity in the country," he said.

On Friday, the hit 20.84 against the dollar, the strongest level against the greenback since Jan. 3. The more than 1.5 percent jump occurred following an afternoon White House statement said U.S. President Donald Trump spoke with Mexican President Enrique Pena Nieto by phone Friday morning for an hour.

Dollar-peso one week performance

Source: FactSet
Note: Y-axis inverted

The Mexican government also said in a statement that the presidents have agreed for now not to speak publicly on payment for the wall, Reuters reported. Both leaders have strong disagreement on the topic.

"The latest [peso] move is sort of the perception that there are negotiations going on behind the scenes that are not immediately visible," said Karl Schamotta, director of FX research and strategy at Cambridge Global Payments. That's "helping to support the peso a little here and generally a perception the peso is a little oversold here."

The strength in the peso Friday followed a drop Thursday after Pena Nieto announced on Twitter he'd canceled an in-person meeting with the U.S. president in a dispute over Trump's U.S.-Mexico border wall. Just a day earlier, the peso had gained as Trump appeared to take a softer stance against Mexico.

Top 5 US trading partners (year-to-date as of Nov. 2016)

Analysts generally expect the peso will remain above record lows hit against the dollar earlier this year, but will likely remain in a choppy range not too far away.

"In the weeks to come, we are going to be completely driven by headlines," said Jason Leinwand, founder and CEO of FirstLine FX.

"What we've seen is we're not just driven by Trump headlines. We're talking about headlines from Mexico," Leinwand said.

Mexican billionaire Carlos Slim said Friday in a press conference that "surely, President Pena Nieto knows he has the country's support. That sense of national unity in support of the president is very important as he and his team continue these negotiations."

The U.S.-Mexico tensions come ahead of next year's Mexican presidential election, which analysts say could affect Pena Nieto's negotiating leverage.

"In a way, [Mexico's business leaders] are sending a signal they are not willing to tolerate abuse" from the U.S., UBS' Czerwonko said.

Mexico was the third largest U.S. trading partner with $482 billion in goods trade last year up to November. The U.S. trade deficit with Mexico is about $60 billion.

Mexico is not paying for that wall: Vicente Fox

— CNBC's Antonio Jose Vielma and Mike Juang contributed to this report.