If the forecasts for the Mexican peso this year were not flattering already, new tariff pressures from Mexico’s main trading partner have just hammered another nail in MXN’s coffin.
The Mexican peso opened the European session at its worst levels of the year against the dollar, following the announcement by Donald Trump on a round of progressive tariffs from 5% to 25%.
The tariffs are due to take effect between June 10th and October 1st, until the Mexican authorities “stop” illegal immigration at the border.
The announcement caused a depreciation of more than 2.7% against the dollar and the euro in the first hours and may precede a worse fortune for the currency.
Until yesterday, the Mexican peso stood out as the second EM currency with the highest gains against the dollar during 2019, only outperformed by the Russian ruble.
The announced tariff measure further increases the risks to Mexican economic growth, which is the main downside pressure in Banxico’s balance of risks.
USDMXN far above its 200-day moving average after Trump’s tariffs threats:
Growth prospects for the Mexican economy, recently revised down to the range of 0.8% -1.8%, are expected to take a further hit if the tariffs will indeed be implemented, as 80% of Mexican exports are destined for US markets.
The tariffs renew fears about the perspectives of ratification of the USMCA trade agreement, on which the relative calm of Mexican financial markets in recent months depended on to a great extent.
Given that illegal immigration is one of the topics Donald Trump desires to rank highly on the 2020 election agenda, we could be witnessing the beginning of more clashes between the two North-American powers in months to come.
This is an unwelcome, and frankly, a rather unexpected development for the Mexican peso, as political risks flowing from Trump’s Twitter appeared to be greatly diminished after the signing of the new USMCA treaty in November 2018.
A new period of prolonged uncertainty for the Latin-American country may therefore have opened up.