Mexican peso extends losses on Trump woes

The Mexican peso and other Latin American currencies weakened on Friday, as investors worried that higher US interest rates could sap demand for emerging market assets. The peso lost nearly 1 percent to the dollar to close at 20.63. On Thursday, Mexico's central bank raised its key rate by 50 basis points to 5.25 percent. The market had bet on a hike of 75 basis points.
Mexican central bank chief Agustin Carstens said on Friday that Mexico could raise interest rates again before the end of 2016, but policymakers also do not want to raise borrowing costs so high they constrict economic growth. "You need to apply medicine, but you don't want to cause an overdose," Carstens told local radio. "What we're trying to do is reach a balance, which is not easy."
The peso ended the week about 1 percent stronger after US president-elect Donald Trump softened certain campaign pledges that have heightened uncertainty over economic growth in the country. The fact that the central bank delivered a more moderate 50-basis-point hike suggests policymakers are comfortable with the peso's current levels, according to Alejandro Hardziej at Swiss private bank Julius Baer.
Some investors are betting Trump will not take as hard a line on trade and immigration as the one he campaigned on. If that comes to pass, the peso could bounce back and ease inflation pressures. But the market is divided on whether the weak peso is a buying opportunity. Societe Generale expects the peso to sink to 23 to the dollar. Remarks by Fed Chair Janet Yellen suggesting a December rate increase was on track also weighed on demand for emerging market assets, with concerns that heavy US spending and lower taxes under Trump would cause the peso to depreciate more.
In Brazil, the real strengthened 0.97 percent to 3.387 to the dollar in morning trading, reversing some of the losses seen in since Trump's win. Heavy central bank and National Treasury intervention in currency and bond markets, seemed enough to stem the real's bleeding, at least for now. Many analysts have singled out the real as among the currencies least vulnerable to US political developments, citing expectations of fiscal reform under President Michel Temer.