Mexican Peso skyrockets unfazed by Trump's national emergency at border
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Christian Borjon Valencia
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20 Jan @ 05:45 (GMT+0)

Mexican Peso skyrockets unfazed by Trump's national emergency at border

  • Mexican Peso strengthens on news of a postponed tariff plan by the incoming Trump administration.
  • The upcoming US-Mexico border emergency declaration could reintroduce tension, impacting Peso's trajectory.
  • Banxico's Deputy Governor Heath suggests a dovish inflation stance, manageable without excessive tightening.

The Mexican Peso (MXN) rallied against the US Dollar (USD) on Monday ahead of United States (US) President Donald Trump's inauguration. An article in The Wall Street Journal suggested that tariffs would not be imposed immediately after Trump’s oath as the 47th President of the US. The USD/MXN trades at 20.53, down over 1.20% after reaching a daily peak of 20.89.

The market mood remains slightly positive as investors prepare for Trump's inauguration. The WSJ article mentioned that Trump directed federal agencies to “investigate and remedy persistent trade deficits and address unfair trade and currency policies by other nations.” Moreover, the presidential memo suggests that Trump’s administration would focus directly on China, Canada and Mexico.

In the meantime, once President Trump takes office, he is expected to declare a national emergency on the US-Mexico border, which could weigh on the Mexican Peso as tensions arise in both countries.

Aside from this, Banco de Mexico (Banxico) Deputy Governor Jonathan Heath was dovish, saying that headline and core inflation figures may hit 4% in January, adding that the Central Bank “does not need to exaggerate a restrictive posture.”

In a post in X, Heath noted that the December inflation report was “good news since it is the first time (inflation) comes below the 4.26% logged in October 2023.”

This week, Mexico’s economic docket will feature Retail Sales, mid-month Inflation and a proxy for November's Gross Domestic Product (GDP) Economic Activity.

Daily digest market movers: Mexican Peso climbs ahead of inflation data

  • The Mexican Peso could take a breather if Trump does not impose tariffs immediately on Mexican imports.
  • However, the Mexican currency is not out of the woods. The divergence between the Banco de Mexico (Banxico) and the Federal Reserve (Fed) hints that further upside in USD/MXN lies ahead.
  • Mexico’s Retail Sales in November plunged to 0.3% MoM and 1.2% YoY.
  • Mid-month inflation in January is foreseen to drop from 4.44% to 3.93%. Underlying inflation is expected to rise modestly from 3.62% to 3.69%.
  • Economists polled by Reuters revealed that GDP will grow 1.2% in 2025, compared to 1.6% last year. Additionally, they foresee Banco de Mexico (Banxico) cutting interest rates by at least 150 basis points to 8.50% by the end of the year.
  • In the Fed’s latest Summary of Economic Projections (SEP), officials estimate they will cut interest rates by 50 basis points.
  • Money market futures had priced in 42.5 bps of Fed rate cuts in 2025, according to CME FedWatch Tool data.

USD/MXN technical outlook: Mexican Peso rises as USD/MXN dips below 20.80

The USD/MXN uptrend remains intact despite the ongoing pullback, which saw the exotic pair reach a daily low of 20.43 near the 50-day Simple Moving Average (SMA) at 20.38 before recovering some ground.

If USD/MXN climbs above the year-to-date (YTD) high of 20.94, it will clear the path to challenge the 21.00 psychological barrier. Once surpassed, the next resistance will be the March 8, 2022 peak at 21.46, followed by 21.50 and the 22.00 psychological level.

Conversely, if the pair tumbles below the 50-day SMA, the next support would be the 100-day SMA at 20.04, which is ahead of the 20.00 mark.

Banxico FAQs

The Bank of Mexico, also known as Banxico, is the country’s central bank. Its mission is to preserve the value of Mexico’s currency, the Mexican Peso (MXN), and to set the monetary policy. To this end, its main objective is to maintain low and stable inflation within target levels – at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%.

The main tool of the Banxico to guide monetary policy is by setting interest rates. When inflation is above target, the bank will attempt to tame it by raising rates, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the Mexican Peso (MXN) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken MXN. The rate differential with the USD, or how the Banxico is expected to set interest rates compared with the US Federal Reserve (Fed), is a key factor.

Banxico meets eight times a year, and its monetary policy is greatly influenced by decisions of the US Federal Reserve (Fed). Therefore, the central bank’s decision-making committee usually gathers a week after the Fed. In doing so, Banxico reacts and sometimes anticipates monetary policy measures set by the Federal Reserve. For example, after the Covid-19 pandemic, before the Fed raised rates, Banxico did it first in an attempt to diminish the chances of a substantial depreciation of the Mexican Peso (MXN) and to prevent capital outflows that could destabilize the country.