How does the debt ceiling affect the Mexican market?
The dollar is considered a safe haven asset, so when there is greater uncertainty and volatility in the market, this currency tends to strengthen, weakening the peso.
“What we are beginning to see is that as the market is becoming more risk off (which sees more risks), with the issue of ceasing to pay, it is an appreciation of the dollar. And we already see how the main currencies of emerging markets (such as the Mexican peso) are beginning to suffer from this volatility”, explains Nicolas Malagardis, market strategist at Natixis investment managers.
This Tuesday, the peso closed at 17.98 per dollar, this is its sixth consecutive day of depreciation, its worst streak since mid-November, after reaching its best level in seven years last week.
“The Mexican currency was affected by an increase in the caution of investors who reduced their demand for risky assets,” Monex Grupo Financiero analysts said in a note. “This after the uncertainty continues around the negotiations to raise the debt ceiling of the United States,” they added.
On the other hand, shares are usually considered risky assets, so in times of uncertainty they also tend to go down. In the last week the
S&P/BMV IPC, the main index of the Mexican Stock Exchange (BMV), has fallen 4% to 53,123 points, its lowest level since March.
“In the coming weeks, tensions in the markets could intensify, since it is most likely that a last-minute agreement will be reached to raise the debt ceiling. History shows that volatility in financial markets increases closer to the key date”, say CiBanco analysts.
For now, all that remains is to wait. Most specialists anticipate that an agreement will be reached and that the United States will not default, because if that happens, “the world financial system is in danger since everything is based on the assumption that the US treasury bond is absolutely safe and will always be paid. If the North American bond is at risk of default, the entire system falters”, says CiBanco.