(Bloomberg) — Mexico’s peso crashed into some formidable global forces this week — Elon Musk, Donald Trump and the Japanese yen.
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The currency shed more than 2% in the past five days, leading global losses as a rally in the yen deterred carry traders, Musk delayed a $10 billion investment and Trump indulged in some Mexico bashing.
Musk’s decision to pause the investment by Tesla Inc. dented optimism over nearshoring, the move to bring production capacity closer to the giant US market. The problem, Musk said, was political risk from Trump’s pledges to impose more tariffs on Mexico-made goods. And then Trump himself weighed in. Asked by Fox News if he would strike against drug cartels across the border, Trump replied “absolutely” and warned Mexico to “straighten it out real fast.”
“There is nobody running out and embracing Mexico’s golden moment of nearshoring anymore,” said Alejandro Silva, chief investment officer at Silva Capital Management in Chicago. “That whole narrative has been ripped up until we see an election outcome.”
At the same time, a rally in the yen undermined the second factor that has stoked the peso’s strength over the past few years — carry traders. The yen is a leading funding currency for investors looking to profit from Mexico’s high interest rates. It’s rally led to a massive unwinding of carry trades.
Poster Child
The Tesla plant had become the poster-child for nearshoring, a trend that had helped make the peso the top performing major currency in the world earlier this year and last.
Its delay came as a blow to Mexican President Andres Manuel Lopez Obrador, who has boasted of record foreign investment into the country. Those investments have been driven by corporations already in the country, rather than new players, who may be putting their plans on ice.
“Musk materialized the fears that Trump could scare away investment and the nearshoring opportunity for Mexico,” said Gabriela Siller, head of economic analysis at Grupo Financiero Base, adding the peso was “on a fast track to 19” per dollar from current levels near 18.50.
Asked about Musk’s decision in his daily press conference, AMLO, as the president is known, dismissed the billionaire’s concerns, saying Trump’s threat was a bluff due to the potential impact on the US economy.
Whatever the case, Trump has ratcheted up attacks on Mexico, promising tariffs and mass deportations, since his nomination speech at the Republican convention last week. There, he unveiled his running mate, Senator JD Vance, who also wants to deal harshly with Mexico, proposing a 10% tax on remittances late last year in the senate.
Yen Volatility
Meanwhile, the yen rose to its strongest mark in more than two months Thursday sparking liquidations in higher-yielding assets around the world. It could rally even more if the Bank of Japan raises interest rates next week, though bets are tilted toward a hold.
Yen-funded bets on the peso have been popular with both global hedge funds and retail investors in Japan over the last few years. If the yen firms past 151 per dollar from the current 153.8, it could drive more losses, said Luis Estrada, a strategist at RBC Dominion Securities Inc.
At the same time, a raft of Mexican constitutional reforms could push the peso to as weak as 20 per dollar around September, Estrada said.
All the factors have led the peso’s six-month implied volatility to jump to about 14%, not far from the highest level since 2021.
Strategists at JPMorgan Chase & Co., who have argued the peso is set to appreciate in the coming quarters, told clients earlier this week to hedge their exposure with a so-called calendar spread derivatives trade.
“Mexico holds the biggest trade balance with the US and hence, the biggest vulnerability to a change in their commercial relationship,” JPMorgan strategists including Tania Escobedo Jacob wrote in a note. “Mindful of the headline risks, we are keeping our MXN hedge.”
–With assistance from Maria Elena Vizcaino.
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