Volatility hits once-mighty Mexican peso, further dip seen as pressures mount

By Noe Torres

MEXICO CITY, Aug 7 (Reuters) - Mexico's peso, depressed by domestic and global factors in recent months, could keep falling as the U.S. economy slows and uncertainty lingers around the November U.S. presidential election.

The currency, once dubbed the "super peso," could weaken further to 21 pesos per greenback, analysts surveyed by Reuters said, from just over 19 pesos on Wednesday. That would be a far cry from the 16.25 pesos in April, its strongest level in nearly a decade, as growing capital inflows to Mexico buoyed the currency.

In recent days, the peso has been hit by a wave of liquidations, especially in Asian markets. The Japanese yen in particular rose to a seven-month high against the dollar as traders unwound so-called "carry trade" positions.

Such trades, which involve borrowing at low Japanese interest rates to invest in say, Mexican assets with higher yields, had supported the peso.

Another weight on the peso is the specter of controversial reforms to Mexico's constitution set for votes next month, including a potential judicial overhaul that would subject judges to popular vote.

A wide budget deficit worries credit rating agencies. And if former U.S. President Donald Trump is reelected, he could again threaten Mexican exports with crippling tariffs.

"Implicit volatility has increased and there are several risks going forward for both Mexico and the United States," said currency analyst Jorge Gonzalez. "The medium-term trend we have is going up," he said referring to the exchange rate.

A Citibanamex survey published earlier this week showed year-end forecasts for the peso ranging from around 18 to 20.10 pesos per dollar.

Currency traders are expected to pay close attention to whether Mexico's central bank holds its benchmark interest rate at 11% on Thursday.

That is the most likely outcome, according to a narrow majority of analysts in a Reuters poll.

"Assuming, as we hope, that the rate does not move, it could put a ceiling on the pressure and the peso can begin to go down a little and then approach 18 per dollar in the following weeks, the following days," said James Salazar, a CIBanco economic analyst.

The peso slipped in early June after Mexico's ruling party won the elections by a landslide, taking the presidency and big majorities in Congress. The result opened the door to market-spooking reforms championed by outgoing leftist President Andres Manuel Lopez Obrador, including eliminating independent energy regulators to concentrate more power in President-elect Claudia Sheinbaum.

In the week following Sheinbaum's June 2 victory, the peso weakened 8%, its steepest fall since the pandemic.

Sheinbaum, expected to largely follow Lopez Obrador's policies, also faces calls to trim this year's ballooning budget deficit of 5.9% of gross domestic product, its largest since the 1980s.

Weaker-than-expected jobs data released last week in the United States, where more than 80% of Mexican exports go, also depressed the peso.

The data, which triggered fears of a possible U.S. recession, prompted the peso to briefly shoot above 20 per dollar late Sunday for the first time in nearly two years. (Reporting by Noe Torres; Editing by David Alire Garcia and Richard Chang)