Exchange rate volatility in the face of NAFTA renegotiation

During the most critical months of the renegotiation, September and October, the exchange rate could reach MXN$18.70 per dollar
Photo: File photo/EL UNIVERSAL
12/07/2017
18:04
Antonio Hernández
Mexico City
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Although in recent weeks the prospects of renegotiating the North American Free Trade Agreement (NAFTA) have been favorable and benefited the Mexican peso, the risks of not reaching a beneficial agreement remain, which could put pressure on to the Mexican currency in the upcoming months, said CIBanco.

CIBanco reiterated that next August 16 initiates the formal process of renegotiation and on July 17, the United States has to publish in its Official Gazette the negotiation objectives agreed by the US Congress and President Donald Trump's administration.

If the renegotiation objectives set by the US are easy to reconcile, a positive environment for the financial markets would be expected. In that case, the exchange rate could maintain in MXN$18 per dollar for the second half of the year.

In contrast, if the objectives imply a setback, it will cause volatility. During the most critical months of the renegotiation, September and October, the exchange rate could be trading on average around MXN$18.70 per dollar and could take some time to go back to MXN$18 if the negotiation gets complicated or delays its conclusion.

According to CIBanco's analysis, even if the negotiation is decisive, a favorable result would help the Mexican currency to get below MXN$18 again.

"The risks are still considerable and the financial markets do not contemplate them in their current valuations. Negotiating with the US could be complicated. Trump and his team do not see NAFTA as an opportunity to strengthen the trade bloc to better face Asian or European competition, but instead keep their speech that they have been affected by the current agreement," the firm said.

Given this scenario, CIBanco estimates that the NAFTA negotiation could be primarily defensive.

"So far Trump seems to suggest win-win conditions, but only in favor of the US, it is not clear whether they are willing to give in or work on alternatives that avoid the disruption of the negotiation. Finally, it is also not clear that once the agreement is negotiated, it obtains fast approval in the US Congress, which could delay the process," it said.

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