During the course of the past few months the U.S. has been taking all of its trading partners head on in an attempt to reduce the U.S. trade deficit and level the playing field regarding global tariffs. As a result, markets have been shaken and consumed with the prospect of a global trade war.
Next week, another major political event could send further shock waves into the markets as Mexico has its Presidential election on July 1. Why is this election so important for Mexico and the markets and the United States? If polls are to be believed, Mexico is about to elect a firebrand populist —Andrés Manuel López Obrador, more commonly referred to as AMLO. His election and potential mandate in the Mexican Congress could bring about dramatic changes within Mexico and its relationship with the U.S.
The Mexican peso has fallen nearly 26 percent since 2015 as a combination of factors have weighed on the currency and the economy. Lower oil prices, Donald Trump's candidacy and election and his continuing rhetoric concerning a renegotiation of NAFTA have caused the MXN to continue to spiral lower. The market has continued to downgrade the Mexican economy as Mexico exports nearly 25 percent of their GDP to the U.S. This, in turn, has forced the hand of the Mexican Central bank to raise interest rates 13 times to 7.75 percent to cushion the weakening peso and prevent imported inflation but has caused the Mexican economy to slow further.
So who is AMLO? As Dave mentioned, he's a leftist populist candidate who has pledged to change the status quo, end corruption, invest in oil refineries and slow the opening of Mexico's energy sector. His popularity is another reflection of the anti-establishment movement around the world, and some of his policy proposals in fact worry the business elite in Mexico. The Mexican people are frustrated with the continuous corruption in government, the violence generated from the drug cartels, the economic problems, and the constant beratement of Mexico by President Trump. In fact, AMLO published a book last year titled “Listen Trump," which sets a more combative tone with the U.S. that resonates with all segments of the Mexican population.
Our View: Andrés Manuel López Obrador has a long political history — this being his third run to become President. There have been times he has been a pragmatist and times he has been a firebrand populist. During this campaign he has tried to balance these two opposing views. Foreign investors will be monitoring this election closely as will be the Mexican business community. Expect a fair amount of near-term volatility in the Mexican markets regarding his election, the composition of the Mexican Congress and his first acts as President.
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