Editors' pick: Originally published March 28.
President Trump's failure to deliver on repealing and replacing Obamacare has investors wondering whether he'll be able to build that Mexico wall he talks about so much, and the peso has responded in kind.
The Mexican peso was the hardest-hit currency in the wake of President Trump's surprise November victory, tumbling 10% from Election Day through the end of 2016 and an additional 5% during the first two weeks of 2017. But since mid-January, it's been on the rise, rallying more than 6% against the dollar over the past month, including about 1.5% over the past week.
"That's the political play," said Michael Klein, professor at The Fletcher School at Tufts University, founder of economics website EconoFact and former chief economist in the Office of International Affairs at the U.S. Treasury Department. "That's sort of saying what's going on is that all this talk about building a wall and making Mexico pay and all of those other things, people are starting to question everything now about the administration's assertions of what it's going to do."
Trump set a tough tone on Mexico from the outset of his campaign.
In his announcement speech, he maligned Mexican immigrants as drug dealers and rapists, and he repeatedly called for a wall at the U.S.-Mexico border for which he insisted Mexico would pay. (Trump says he still plans to build the border wall, but he and Mexican President Enrique Pena Nieto have agreed not to talk about who will pay for it -- so far, the U.S. is.) Trump also plans to renegotiate the North American Free Trade Agreement, enacted in 1994.
Friday's decision to pull a bill to repeal and replace Obamacare has sown doubt in Washington and on Wall Street about Trump and the GOP's ability to execute on essentially everything, including Mexico and immigration policy.
"The peso is certainly celebrating Trump's first defeat in Congress," said Alfredo Coutino, Latin America director at Moody's Analytics. "The health care rejection was positive...because it signaled markets that Trump will have restrictions to implement his ideas."
The peso hit its strongest point against the dollar in 2017 on Friday, and some analysts anticipate it will continue to climb. Mexican news outlet El Economista pointed out that Mexico's central bank is tightening monetary policy and is expected to increase interest rates this month, another positive sign for the peso.
To be sure, there are no guarantees the peso's strength will stick, especially given Trump's volatile nature.
"More rejections will also scare markets more later, since Trump might take a more aggressive attitude and will try to impose his ideas regardless of the damage to be caused to the economy," Coutino warned.
There are already signs things could be heading in that direction. Attorney General Jeff Sessions appeared at a White House press briefing on Monday to discuss immigration and reiterate the Department of Justice's immigration enforcement mandate. He said the administration would seek to withhold grants from sanctuary cities.
"The Department of Justice has a duty to enforce our nation's laws, including our immigration laws," he said.
Investors in the Mexican peso can enjoy their honeymoon -- for now.
Correction: This article previously referred to Mr. Klein as chief economist at Treasury. He served as chief economist in the Office of International Affairs at Treasury from 2010-2011.