USD/MXN rises above 20.50 due to renewed tariff threats from Trump
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Akhtar Faruqui
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31 Jan @ 02:37 (GMT+0)

USD/MXN rises above 20.50 due to renewed tariff threats from Trump

  • USD/MXN appreciates as Trump reiterated plans to impose a flat 25% import tax on all goods from Canada and Mexico.
  • The economic slowdown in Mexico reinforces the likelihood of Banxico’s larger rate cuts.
  • US Gross Domestic Product Annualized fell to 2.3% in Q4 from the previous 3.1%, missing expectations of 2.6%.

The USD/MXN pair continues its upward momentum for the second consecutive session, trading around 20.70 during Asian hours on Friday. The Mexican Peso (MXN) remains under pressure following renewed tariff threats from US President Donald Trump.

On Thursday night, Trump reiterated plans to impose a flat 25% import tax on all goods entering the US from Canada and Mexico, citing concerns over fentanyl. The first wave of tariffs on both countries is set to take effect on February 1, according to Reuters. Additionally, Trump hinted at the possibility of imposing tariffs on Canadian and Mexican Oil exports.

In a separate statement on X (formerly Twitter), Trump also reaffirmed his threat to levy 100% tariffs on BRICS nations if they attempt to introduce an alternative currency to challenge the US dollar in international trade.

Economic data from Mexico further weighed on the Mexican Peso. INEGI reported that Mexico’s GDP shrank by 0.6% in Q4 2024, a sharp contrast to the 1.1% expansion in the previous quarter and well below market expectations of a 0.2% decline. This marks the first contraction since Q3 2021. On an annual basis, GDP grew by just 0.6%, missing forecasts of 1.2% and reaching its lowest rate since Q1 2021.

The economic slowdown aligns with signals from Banco de México (Banxico) that larger rate cuts could be on the horizon, particularly if US tariff threats materialize. The central bank is expected to lower rates by at least 25 basis points (bps), bringing them down from 10% to 9.75%, though analysts at Capital Economics suggest a 50 bps cut remains a possibility. 

Meanwhile, US economic data showed signs of slowing growth. The Department of Commerce reported that Gross Domestic Product Annualized (Q4) fell to 2.3% from 3.1%, missing expectations of 2.6%. Additionally, Initial Jobless Claims for the week ending January 24 came in at 207K, below forecasts of 220K but an improvement from the previous week’s 223K.

Investors now turn their attention to key US data releases later on Friday, including Personal Consumption Expenditures (PCE), Personal Income and Spending figures, and the Chicago Purchasing Managers' Index (PMI).

Tariffs FAQs

Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.

Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.

There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.

During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.