On Monday, Latin American foreign exchange traders were riveted to their screens, watching for a potential milestone as the Mexican peso hovered at 19.90 pesos per U.S. dollar on the interbank market.

That was an all-time low in terms of the peso’s weakness against the dollar and within a hair’s breadth of hitting an unprecedented 20 pesos per dollar.

But the peso never actually got there. 

Someone, somewhere, decided that it might be a good idea to wait until after the first U.S. presidential debate Monday night before trying to push the currency pair over that threshold. 

And when market perceptions took hold that Donald Trump was not doing well in the debate, the peso strengthened to about 19.40 per dollar. That is due to the fact that the Republican nominee’s policies are associated with increased barriers to trade.

Yes, we live in times when “geopolitics” are that highly dependent on the global economic and political situation.

During the last few months there has been an uncanny correlation between the strength or weakness of the Mexican peso and the latest twists and turns in the U.S. presidential election, with the peso moving in line with expectations about trade policy for the next four years.

This leaves the Mexican central bank in a quandary. These moves have become quite volatile and many analysts feel that these swings are not justified, considering the reality of what any U.S. president can really accomplish on his or her own, as well as the economic fundamentals of Mexico.

Such was the situation when the Mexican central bank met this week and raised interest rates, as expected by the market.  It was an effort to attract capital to Mexico to offset the rapid decline of the peso, but, of course, it tightens credit a bit.  It is clearly a gamble the bank felt it could take.

Our View:  Going into year end, we expect Mexico’s central bank to stand aside from this point on. Ultimately, events north of the border are out of their control, and they will have to ride out any volatility for the balance of the year. 

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