Swine Flu has Mexican peso bears feeding at the trough

After a good run-up in the last month, the Mexican Peso is getting crushed in the currency markets today.  How much of the pullback is a result of the news regarding Swine Flu and how much is technical, due to the prior run up, is hard to identify.  Nevertheless, the outbreak will have a negative effect on the Mexican economy and trade, making the recent IMF package Mexico has received a good buffer in case things get worse. Russia and China have already banned U.S. pork imports as well (Sounds like a political move if you ask me).

The Currency Strategy Team at Brown Brothers Harriman notes that the U.S. Dollar and the Japanese Yen are benefiting against a wide swathe of Emerging market currencies, not just the Peso.  And airline stocks are getting hammered as well.

The US dollar and yen are up against the major and emerging currencies. Concerns Mexican swine flu could become pandemic after Pres Obama declared it a public health emergency helped drive the dollar and the yen higher with the Mexican peso the hardest hit, falling over 2% against the US dollar. While the outbreak has potential to create additional problems for the global economic slowdown, so far officials have responded quickly and decisively to the outbreak, something that did not happen during the SARS outbreak. The euro is already overextended on the downside and is likely to trade higher as the focus turns to other event risks this week, the FOMC meeting, the release of further bank earnings reports and the stress test.

The global equity markets are being hit by concern about swine flu adding to existing concerns about US banks amidst talk 3 of the 19 US banks that underwent Federal stress tests have been asked to raise capital. Still, airlines have been amongst the hardest hit today while health care related equities are benefiting. In Asia, China’s Shanghai Composite, down 3.2%, and the Hang Seng, down 2.7%, were amongst the hardest hit in Asia but not just due to memories of China’s slow response to the SARs epidemic. China’s largest bank, ICBC fell over 5% on reports Amex and Allianze planned to sell shares. Japan’s Nikkei bucked the trend, adding just 0.2% as M&A related news supported the market. European bourses are lower, erasing some of last week’s gains while early indications suggest US markets will open sharply lower. On a positive note, Chrysler reached a tentative agreement with UAW that boost the odds it can avoid bankruptcy. Most commodities are lower including gold and oil. Grains are also lower on concern demand for animal feed grains could fall.

While the crisis has not hit epidemic proportions (see Paul Kedrosky’s bubonic plague map), an epidemic outbreak is clearly on everyone’s minds as more than 100 people in Mexico have died.

If you are looking to get a read on epidemics, try John Barry’s The Great Influenza about the Spanish Flu epidemic of 1918-1920.

Below is a CNBC video of how Swine Flu spreads in humans.