Mexico City - Mexico's peso plumbed its lowest-ever levels as Donald Trump's lead in key battleground states in the US presidential election early on Wednesday drove investors to re-assess their positions as Trump looked increasingly likely to win the White House.
Trump's threats to rip up a free trade agreement with Mexico and tax money sent home by migrants to pay for building a wall on the southern US border if elected president have made the peso particularly reactive to events in the race for the White House.
The peso weakened by more than 13 percent in Tuesday after-market trading for Mexico and in Wednesday trading in Asia, breaking past 20 pesos per dollar - its biggest fall since the 1994 Tequila Crisis.
The peso was trading around 12 percent weaker at 20.495 per dollar by early Wednesday, prompting the central bank to call a joint press conference with the Finance Ministry for 07h00 local time (08h00 EST/13h00GMT).
“There's a lot of panic in the market, it is definitely an outcome it was not expecting,” said Juan Carlos Alderete, a strategist at Banorte-IXE. “The movements are very strong, the market is showing higher risk aversion in search of safe-haven assets.”
Three economists told Reuters they expected the central bank to raise its benchmark interest rate by an impromptu 75 to 150 basis points on Wednesday if Trump wins, while one of them said the bank could instead opt for a swap with the US Federal Reserve pending how the peso evolves.
“I don't think a Trump scenario was taken seriously in the last days by the market. Hopefully there are some contingency plans by authorities and they can take measures to protect the Mexican economy,” said Ernesto Revilla, an economist at Banamex and the government's former chief economist.
Mexican central bank head Agustin Carstens last week said the country was ready in case of an “adverse” result in the US election, which he has said could hit Mexico like a “hurricane”.
The central bank has already hiked its rate three times this year, lifting it to 4.75 percent to anchor inflation expectations following a sharp depreciation of the peso.
Earlier on Tuesday, the Mexican currency had rallied nearly 1.4 percent before official election results began to be released, as final polls showed a Clinton advantage.
Measures of peso volatility, or bets on potential swings in the currency, spiked to their highest levels since the financial crisis, while the volume of wagers in peso futures contracts surged to a record high during the last 50 days.
“This is truly a historic moment. I don't recall such an extreme outlook on the US economy that could be so negative to the Mexican economy,” said Benito Berber, an analyst at Nomura in New York.
Berber said a Trump win could drive the peso to between 23 and 26 per dollar.
Implied volatility in one-week peso-dollar options contracts surged to the highest level since the financial crisis ahead of the election, although levels dipped this week.
Daily volume in the front-month future peso contract has averaged more than 61 000 contracts over the last 50 days, nearly three times the historic mean of around 23 000.
REUTERS