A lot is at stake for Mexico in the coming weeks, as trade talks are about to bleed into the campaign kickoff for the country’s presidential election in July, which has investors bracing for market-driving headlines.
Mexican assets EWW, -2.11% , including the peso USDMXN, -0.2977% are a popular destination for investors who want emerging-market exposure that is tied closely to developed economies (in Mexico’s case, the U.S.).
But with renegotiation talks of the North American Free Agreement in their seventh round and the left-wing candidate Andres Manuel Lopez Obrador polling best so far, there are numerous unknowns that could shake Mexican assets. That said, for now “the market seems happy to be long the peso,” said Christian Lawrence, senior foreign-exchange strategist at Rabobank, evidenced by the scarcity of peso selling after Mexico’s GDP numbers fell short of expectations last week.
But that could be about to change.
Front-runner Obrador, a former mayor of Mexico City who founded his National Regeneration Movement, or Morena, in 2014, is considered the populist in a field of more traditional candidates. However, he is “potentially also more pragmatic and less corrupt,” said Eric Donovan, managing director for over-the-counter currencies trading and interest rates at INTL FXStone Market, earlier this month.
One of Obrador’s rivals, Ricardo Anaya, the candidate of a right-left coalition, rejected corruption allegations just this weekend. “But, that said, you can’t really tell how someone will be in office until they’re in office,” Donovan added.
“The ‘worst’ outcome of the Mexican election in terms of Nafta is a victory by Obrador, just because he’s a big unknown,” said Rabobank’s Lawrence, who said he is not anticipating a 180-degree turn from current Mexican policy under an Obrador presidency.
The Mexican peso would likely sell off if he got elected — again, because the newcomer represents an unknown to market participants, Lawrence added. Also, “international markets don’t like populists, particularly if they’re not pro-business,” he said, and that could mean more strain for Mexico’s currency and other assets.
The seventh round of renegotiations of the North American Free Trade Agreement began Sunday in Mexico City. But this round of talks, due to last until March 5 and initially expected to be the last round, is likely not going to lead to a deal. A next round is now foreseen in April.
“I think the [Nafta] negotiations will be extended until after the Mexican elections [in July],” said Donovan.
On Monday, the current Mexican president. Enrique Peña Nieto, reportedly canceled a planned visit to the White House, which could add iciness to Nafta negotiations, and that helped push the peso lower against the U.S. dollar. On Tuesday, one dollar bought 18.7540 pesos, up 0.4% from Monday.
Previously, Bank of America Merrill Lynch economist Carlos Capistran, who focuses on Canada and Mexico, called the scheduled Peña Nieto–Trump meeting a “window of opportunity” for the Nafta talks. Now, this window looks to have closed.
“Our baseline continues to be negotiations that extend for many months, followed by months for the approval process, with posturing ahead of each negotiating round,” Capistran wrote. “Remember that even after a deal is reached, the final approval could take many months, and it is unlikely to happen in 2018. Congresses in the U.S. and Mexico that are likely to sanction the deal are not yet in place, as both change with elections this year.”
U.S. midterm elections are set for November.
“I could also see the Trump administration tie a renegotiation deal to immigration somehow,” Donovan added.
Another reason the talks could stall is that the third Nafta partner, Canada, is unlikely to abandon its tough stance on keeping arbitration panels as part of the pact. These dispute panels are meant to assist companies in resolving trade conflicts and have been something of a nonnegotiable for Canada, though, according to Lawrence, it can be hard to tell negotiating tactic from firm position.
“If a deal is announced, it will likely support asset prices in Canada and in Mexico, in particular exchange rates, and could detonate the investment that so far has been delayed,” said Capistran.