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Mexico peso bleeds as forecasts keep Trump U.S. election hopes alive

A deep slump in the peso could stoke inflation, but it would also help compensate exporters, who could face new tariffs under a Trump presidency.

English 08/11/2016 20:36 Mexico City Michael O'Boyle and Miguel Gutierrez / Reuters Actualizada 20:36
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Mexico's peso sank sharply on Tuesday night as U.S. Republican presidential candidate Donald Trump took the lead in the key battleground state of Florida and was seen winning a clutch of other states, keeping him in contention to take the election.

Concerns of a Trump victory had weighed heavily on the peso since he had threatened to rip up a free trade deal with Mexico and tax money sent home by migrants in order to build a wall on the southern U.S. border.

The peso weakened more than 5 percent in Tuesday after-market trading for Mexico and Wednesday trading in Asia, trading at over 19 pesos per dollar.

Earlier on Tuesday, the Mexican currency had rallied nearly 1.4 percent before official election results were out, as final polls showed a Clinton advantage.

Although the market has priced in a Clinton victory, traders said the currency would be volatile until more conclusive results came through.

In the run-up to the election, Mexico's peso oscillated wildly, slumping when Trump's chances of winning improved and rallying when Clinton took the lead in polls.

Measures of peso volatility, or bets on potential swings in the currency, spiked to their highest levels since the financial crisis, while the volume of wagers in peso futures contracts surged to a record high during the last 50 days.

"This is truly a historic moment. I don't recall such an extreme outlook on the U.S. economy that could be so negative to the Mexican economy," said Benito Berber, an analyst at Nomura in New York.

"You have to go back to when the United States took half of Mexico's territory" to find such a moment when U.S. politics had such a potential impact on Mexico, he added.

An unexpected victory by Trump could fuel a more than 12 percent drop in the currency to a record low of 21 per dollar, according to a Reuters poll. Berber said a Trump win could drive the peso to between 23 and 26 per dollar.

A Trump-inspired peso tumble could push Mexico's central bank to raise interest rates or directly intervene in forex markets. But confirmation of a win by Clinton could fuel an additional rally by the peso to around 18 per dollar, according to Reuters polls.

There could be a bigger-than-expected rally in the peso as funds that hold peso debt or companies operating in Mexico unwind bets they made in the derivatives market as protection from the risk of a Trump upset.

"A Clinton win is fairly priced in," said Alessio DeLongis, a fund manager and macro strategist at OppenheimerFunds. "But what is difficult is accounting for the impact for all the unwinding of hedges."

While the peso spot rate was trading around its recent highs and largely pricing in a win by Clinton, volatility measurements were off the charts.

Implied volatility in one-week peso-dollar options contracts surged to the highest level since the financial crisis ahead of the election, although levels dipped this week.

"If we get a shocking result, the peso would slice above 20 like a hot knife through butter," said Paresh Upadhyaya, director of currency strategy at Pioneer Investments.

Daily volume in the front-month future peso contract has averaged more than 61,000 contracts over the last 50 days, nearly three times the historic mean of around 23,000.

Major banks told clients to expect volatile currency markets in the aftermath of the U.S. election. One Goldman Sachs client said the bank advised on Monday it would not accept new stop-loss orders on the peso until further notice.

Even before concerns about a Trump victory were taken seriously, the peso was one of the worst-performing major currencies this year due to worries about a bailout of state-run oil company Pemex and ballooning government debt.

A deep slump in the peso could stoke inflation, but it would also help compensate exporters, who could face new tariffs under a Trump presidency.

Mexican central bank head Agustin Carstens last week said the country was ready in case of an "adverse" result in the U.S. election, which he has said could hit Mexico like a "hurricane."

(Additonal reporting by Dan Burns; Writing by Michael O'Boyle and Gabriel Stargardter; Editing by Simon Gardner and Leslie Adler)

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