As Trump Agenda Falters, Mexico Peso Regains Pre-Election Strength
Mexican President Enrique Peña Nieto and then-Republican candidate Donald Trump.

President Donald Trump's tenure as chief foe of the Mexican peso may be coming to an end.

Mexico's currency dipped below 18 pesos to the U.S. dollar for the first time since May 2016 on Wednesday. Currency investors once wary of Trump's fiery rhetoric against Mexico appear increasingly persuaded his bark is worse than his bite.

The peso was slammed in the wake of Trump's surprise November victory, tumbling about 10% from Election Day through the end of 2016 and an additional 5% during the first couple of weeks of 2017 on concern he might seek to withdraw the U.S. from the North American Free Trade Agreement or make good on his pledge to build a wall along the border between the two countries.

The peso bottomed out at about 22 pesos to the dollar ahead of the inauguration. But since then, the currency has been on the rise, recovering from its post-election decline and then some.

While the peso has shown some volatility in reaction to the president's tweets and reports he might withdraw from NAFTA, since his inauguration, the landscape has been largely positive. Alfredo Coutino, Latin America director at Moody's Analytics, said there are two contributing reasons.

"First, a slowdown in the tone of threats from Trump against trade, investment and immigration, particularly after the agreement reached by the two presidents on not talking publicly about the border wall and who will pay for it [has boosted the peso]. This certainly reduced the degree of instability in financial markets," he said.

Trump and Mexican President Enrique Pena Nieto in January agreed to stop discussing border wall payment publicly after engaging in a war of words on Twitter.

Second, Mexico's bonds have become increasingly attractive due to the acceleration of interest rate differentials with respect to U.S. bonds.

"Bank of Mexico [Mexico's central bank] has increased the policy rate by 375 basis points versus the Fed's rate increase of only 100 basis points," Coutino said. "This has stopped capital outflows from Mexico and has also attracted more investment into the domestic money market."

To be sure, the peso's current strength is not guaranteed to last. The currency floated back above 18 to the dollar on Thursday.

"Mexico's economy continues to face imbalances and distortions, such as fiscal and external deficits and galloping inflation," Coutino said. That will likely prevent it from strengthening much more against the dollar.

And then there is the ever-volatile Trump. The questions swirling around the Russia investigation, the Trump campaign's ties to Russia and, according to reports just this week, obstruction of justice have slowed the White House agenda in a number of arenas, including health care, tax reform and trade. But NAFTA renegotiations are expected to pick up in August.

"U.S. negotiators have been perfectly clear about what Trump wants: a reduction in the U.S. trade deficit with Mexico," Coutino said. "And they will fight for it even to the point of bringing back the threat of abandoning NAFTA."

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