Anyone following markets these days knows that they have been on a tear, particularly global equities which have been higher across the board.  

The U.S. dollar has also generally been stronger, particularly in the last week, as expectations have solidified in recent days that the U.S. Federal Reserve intends to raise the federal funds rate on March 15.

It therefore may come as a surprise that the best performing currency among the more commonly traded currencies is the Mexican peso.  

Since the inauguration of Donald Trump, the peso is up 9 percent in value – probably not what most investors expected.  

During 2016, the Mexican peso reacted in line with expectations about whether the policies of then-candidate Trump would be enacted. Certainly any casual observer would score the first few weeks of the new administration as not necessarily being favorable to Mexico

So why is the peso so strong? 

The explanation is a story of true fundamental currency trading basics. There are two primary reasons we have seen the peso rising since Jan. 20:

  • So many investors had sold off pesos over the last few months that short peso positions began to get extreme. When those positions began to unwind, we saw a snap back in the value of the peso.
  • The Bank of Mexico, Mexico’s central bank, has been surprisingly hawkish – hiking interest rates to both halt the slide of the peso and rein in inflation.

Both of these explanations are fairly commonplace for foreign exchange markets. Clearly, they are overwhelming what had been a popular narrative that the peso would never recover during President Trump’s administration.

The reality of foreign currency trading is that the primary drivers of currency valuations shift and change, sometimes with great volatility and without warning.  

My View: In these days of emotional markets and the increasing influence of currency moves on potential fiscal policy, it is important to keep in mind that trading on fundamentals and traditional valuation factors ultimately reasserts itself.

The information in this report was compiled by the staff at City National Bank from data and sources believed to be reliable but City National Bank makes no representation as to the accuracy or completeness of the information. The opinions expressed, together with any estimate or projection given, constitute the judgment of the author as of the date of the report. City National Bank has no obligation to update, modify or amend this report or to otherwise notify a reader in the event any information stated, opinion expressed, matter discussed, estimate or projection changes or is determined to be inaccurate. This report is intended to be a source of general information. It is not to be construed as an offer, or solicitation of an offer, to buy or sell any financial instrument. It should not be relied upon as specific investment advice directed to the reader’s specific investment objectives. Any financial instrument discussed in this report may not be suitable for the reader. Each reader must make his or her own investment decision, using an independent advisor if prudent, based on his or her own investment objective and financial situation. Prices and availability of financial instruments are subject to change without notice. Financial instruments denominated in a foreign currency are subject to exchange rate risk in addition to the risk of the investment. City National Bank (and its clients or associated persons) may, at times, engage in transactions in a manner inconsistent with this report and, with respect to particular securities and financial instruments discussed, may buy from or sell to clients or others on a principal basis. Past performance is not necessarily an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.