Economics: Election year forex volatility redux
Mexican presidential election campaigns have long been preceded by months of foreign exchange and stock market volatility. The source of such turbulence generally involves uncertainty as to what sort of program each competitive candidate might implement and which candidate is likely to emerge victorious. In some election cycles international factors have also played an important role in stoking volatility and pre-Election Day peso devaluation. We are witnessing similar trends this time around. The peso only began to beat a hasty retreat against the dollar in April this year as opposed to March of presidential election years past, but the extent to which the Mexican Stock Exchange has backed away from its January highs has largely mirrored the performance of the S&P 500.
The factors fueling international uncertainty have included the usual suspects of Nafta renegotiation talks, US fiscal reform, and daily tweets and statements from the US president on related and sundry issues, which have also contributed to heightened dollar volatility relative not only to the Mexican peso but other widely traded currencies as well. But closer to home the main concerns surround this July’s presidential election.
It is too early to know who will win, and the presidential hopefuls have yet to offer much in the way of essential details regarding their governing proposals. Investors will be looking, above all, for commitments to defend the country’s macroeconomic fundamentals through greater fiscal discipline that extends beyond balancing revenues and spending to include an efficient and effective implementation of investment expenditure, as well as a commitment to assuring that any new debt assumed by the government will be used directly for productive investment and would be repaid. Their generic wish list also includes respect for the country’s autonomous institutions as well as the structural reforms of recent years. More generally, they want a governmental plan that incentivizes growth, fights poverty and that is, above all, credible.
In our view at GEA, anything that could lead investors to believe that the next administration might fail to abide by such principles would likely lead to an extension of current foreign exchange volatility beyond the election cycle.
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