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Mexico's peso faces volatility spikes ahead of U.S. election

MEXICO CITY, Oct 7 (Reuters) - Mexico’s peso is facing the highest volatility in five months, experts say, as markets grow nervous about the upcoming U.S. presidential elections and possible economic policy outcomes.

So far this year, the currency of Latin America’s second-largest economy has fallen more than 13%, trading at about 21.5 pesos per U.S. dollar.

Mexico has grappled with the fallout of the coronavirus pandemic and its currency is highly sensitive to both political and economic developments of its closest trading partner.

“Volatility will remain high until the end of November, said Christian Lawrence, a strategist at Rabobank. “Of course it will come from the United States.” Lawrence said the exchange rate could even touch 23 pesos per U.S. dollar.

Implied volatility for peso-dollar derivatives maturing in one month, roughly the time remaining until November 3 election, stands at 19.55%, the highest since mid-May, Refinitiv Eikon data shows.

Meanwhile, the number of instruments like futures and options that trade on an expected appreciation of the peso fell by 55% until September 29, the last available, Refinitiv Eikon data, citing the Chicago Mercantile Exchange (CME), shows.

A Reuters poll found market participants expect the exchange rate to weaken to 22.08 pesos per U.S. dollar by November, implying a 3.3% depreciation from its current level.

Recent political turmoil has added to uncertainty.

Mexico’s peso lost 1.5% on Tuesday, mostly after U.S. President Donald Trump’s announced the White House’s sudden exit from fiscal stimulus talks with Democrats in Congress.

It has since recovered the losses.

Presidential elections have previously driven up peso volatility.

The currency lost 10% in the 12 months before the 2016 presidential election and another 20% in the two months after Trump won, dropping to 22 pesos per U.S. dollar, Refinitiv Eikon data shows.

Other emerging market currencies face a similar fate.

“In the middle of a campaign where surprises and unpredictable events have been the constant, it’s difficult to expect gains in the short term in emerging markets,” said Andres Jaime, a foreign exchange strategist at Barclays. (Reporting by Abraham Gonzalez; Writing by Stefanie Eschenbacher Editing by Nick Zieminski)