Mexico peso bulls counting on a Nafta agreement to bolster the currency may be running out of time.
While negotiators are working to reach at least a preliminary trade deal by the end of this month, prospects for an accord are far from certain. At the same time, investors are growing increasingly concerned about a peso rout if the left-wing firebrand leading polls goes on to win July’s presidential election.
Strategists are warning that even if the government announces an agreement that saves the North American Free Trade Agreement, any pop for the peso may be short lived as the market turns its attention back to the election. Front-runner Andres Manuel Lopez Obrador is 15 percentage points ahead of his closest rival just six weeks before the vote, alarming investors concerned he’ll roll back efforts to open the oil industry and put roadblocks up to growth.
“Any recuperation we may see in the peso would be temporary, with a market more attentive to the elections,” said Jesus Lopez, an analyst at Banco Base in Monterrey, Mexico, who forecasts the peso will weaken slightly from current levels by the end of the year.
The peso has fallen 7.4 percent since the end of the first quarter, among the worst performances in emerging markets. Trading at about 19.8 per dollar now, it’s headed for a fifth straight week of declines amid speculation that Lopez Obrador’s rivals won’t be able to catch up to him before the July 1 election.
Traders in the forwards market are betting the peso will weaken to about 20 per dollar in one month and 20.2 in three months. One-month implied volatility jumped to 14.5 percent on Tuesday, the highest in 15 months, a sign that markets expect intense peso swings in the next few weeks.
If negotiators can’t reach at least a preliminary Nafta deal this month, any agreement may be a long way’s off. The U.S. doesn’t have much time to get a revised deal approved under the current Congress, with mid-term elections on Nov. 6. Meanwhile, Graciela Marquez, tapped to become economy minister in a potential Obrador administration, said negotiations should be put on hold until the new government takes power in December if no deal is done before the vote.
U.S. House of Representatives Speaker Paul Ryan has set a May 17 deadline in order for Congress to vote on any Nafta agreement this year. So far, the three ministers leading Nafta talks aren’t scheduled to meet together in person before the deadline, and Mexican Economy Minister Ildefonso Guajardo told Televisa that a deal before Thursday is unlikely.
“It’s difficult to know what type of agreement they’re going to come to that will be ratified,” said Mario Castro, an analyst at Nomura Holdings Inc. based in New York. The lack of a deal “would be negative and it would add momentum to all the presidential election noise.”