Since the end of 2015, the problems of the Mexican peso are due to two main factors: the Fed\u2019s policies and the country\u2019s risk perception, when it comes to the US elections.<\/p>\n
How the Federal Reserve Affected the Peso<\/h2>\n
The fed\u2019s policy gravely affected the peso when it raised its benchmark interest rate in December of last year. This decision strengthened the dollar: the yield of having dollars is higher compared to other currencies. For the Mexican peso, this had a direct effect.<\/p>\n
To defend the peso and prevent it from devaluating further, the Bank of Mexico raised its benchmark interest rate only one day after the Fed did. Since then, Banxico\u2019s fear of a future US rate hike and the pesos\u2019 constant devaluation forced the bank to react.<\/p>\n
Banxico Reaction and its Active Role in 2016<\/h2>\n
Banxico intervened in the foreign exchange market in 2016. By the end of January, it auctioned dollars to moderate the volatility that accompanied the sharp fall of Mexico\u2019s currency.<\/p>\n
Banxico also raised its benchmark interest rates three times this year: in February from 3.25% to 3.75%; on June 30th<\/sup> from 3.75% to 4.25%; and on September 29 when it raised it to 4.75%.<\/p>\n Banxico\u2019s rate increase has two objectives: First, to avoid an inflationary spiral as higher rates restrict the flow of credit. Second, to compensate for the effect of the Fed\u2019s rate increase and anticipate a new rate hike that could happen at the end of the year.<\/p>\n The intervention in the foreign exchange market did not continue, largely because the depreciation of the peso has not increased domestic prices in a way that justifies future intervention. Inflation remains close to the 3% target set for 2016.<\/p>\n As previously mentioned, the second factor affecting the Mexican peso is the country\u2019s risk perception. The slow economic growth derived from the Mexican industry lack of dynamism is of little help.<\/p>\n Without a doubt, the main source of pessimism and alarm for economic agents has a name: Donald Trump. Alarms went off because throughout his campaign Trump spoke about renegotiating NAFTA, tax remittances, and threatened to build a wall between United States and Mexico.<\/p>\n The following graph shows how as Trump\u2019s probability of winning the election increased, the peso depreciated.<\/p>\nTrump\u2019s Victory: Pessimism takes over economic agents<\/h2>\n
![\"A.104-1DailyExchangeRateMexicanPesos\"](\"https:\/\/trends.ufm.edu\/en\/wp-content\/uploads\/2016\/11\/A.104-1DailyExchangeRateMexicanPesos.png\")
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