Mexican peso: strongest currency in the world last week - BBH

Analysts at Brown Brother Harriman noted that the Mexican peso was the strongest currency in the world last week, despite the escalation of tensions. The Mexican peso bottomed on January 11 and retested the low on January 19. It rose 3.3% last week, closed firm, and is posting further gains today. Since it trended higher consistently last week, it is difficult to know the true impact of reports that the two Presidents talked after a scheduled meeting was canceled when Mexico refused to pay for the wall that Trump insists upon the building.  

Key Quotes

"Some suggest that the peso's recovery was the realization that things could not get worse, though after the peso bottomed, things have in our view have indeed gotten worse. This took the form of a suggestion that among the things that the US could do to get Mexico to pay for the wall was a 20% tariff on Mexico's exports to the US.  While this seems far-fetched, as we have noted, the US President can impose a 15% temporary tariff under conditions of a balance payments emergency."

"Given the complicated continental trade where a part could cross the border several times, the law of unintended consequences risks significant economic dislocations in the US. Others suggest it is the Negotiator-in-Chief posturing. Consider this: before last week's peso gains and since the beginning of 2016, the peso had depreciated by more than a fifth, partly driven seemingly by Trump's comments, which if sustained would seem to offset some of the sting of a tariff." 

"This is Trump's first tangle and one that he prioritized. It is important that he wins it from a political point of view. The wall is of great symbolic value. It is a campaign promise that many of his supporters appear to have taken literally."  

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