Mexican Peso tumbles amid renewed fears over Trump policies
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Christian Borjon Valencia
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27 Jan @ 07:21 (GMT+0)

Mexican Peso tumbles amid renewed fears over Trump policies

Most recent article: Mexican Peso stages recovery amid trade war tensions, improved risk appetite

  • Mexican Peso under pressure following Trump tariff threat on Colombian goods.
  • Banxico's new monetary program hints at aggressive rate cuts, a headwind for the Peso.
  • Traders await upcoming Mexican economic reports on unemployment and preliminary Q4 GDP.

The Mexican Peso plummeted against the Greenback on Monday after US President Donald Trump announced on Sunday that he would impose tariffs on Colombian goods after Colombian President Gustavo Petro wouldn’t allow planes from the United States (US) to carry migrants on deportation flights. Trump then backtracked on the tariffs on Monday morning once the two leaders came to a deal to allow the deportations. This and Banco de Mexico's (Banxico) dovish rhetoric sponsored a leg-up in the exotic pair. The USD/MXN trades at 20.70, up by more than 2%.

Over the weekend, US President Donald Trump informed his social network of Petro’s decision, which sparked several US retaliation measures including the tariff threat. Consequently, the Mexican Peso, used as a proxy for other Latin American currencies, weakened in early trading on Monday.

In the meantime, the Instituto Nacional de Estadistica Geografia e Informatica (INEGI) revealed that the Balance of Trade posted a surplus in December. However, seasonally adjusted, the deficit narrowed compared to November figures.

Meanwhile, Banxico presented its Monetary Program for 2025, in which the Central Bank hinted that the Governing Board is eyeing cuts to its main reference rate of a greater magnitude than previously seen in 2024.

Banxico’s Governor Victoria Rodriguez Ceja said that they see an adverse scenario with Trump, adding that some of his policies could pressure Mexico’s economy.

She added, “On the one hand, greater economic weakness would tend to moderate pressures on prices and, on the other hand, a greater exchange rate depreciation represents an upward risk for inflation. These effects in opposite directions could even offset each other, but we would have to be attentive, if necessary, to the measures that could be implemented.”

Ahead this week, Mexico’s economic docket will feature the Unemployment Rate for December, along with the release of preliminary Q4 2024 Gross Domestic Product (GDP) figures.

Daily digest market movers: Mexico’s Balance of Trade failed to bolster the Peso

  • INEGI revealed that the Balance of Trade for December was 2.567 billion, up from a -0.133 billion deficit. Seasonally adjusted, the trade deficit narrowed from -0.775 billion to -0.684 billion for the same period.
  • Economists polled by Reuters project GDP to dip -0.2% QoQ from an expansion of 1.1%. On an annual basis, GDP is foreseen to edge lower from 1.6% to 1.2%.
  • Citi revealed its Expectations Survey, in which Mexican private economists revised GDP figures for 2025 downward to 1%.
  • Regarding inflation expectations, analysts estimate headline and core inflation to dip below 4%, each at 3.91% and 3.68%, while the exchange rate would likely end near 20.95.
  • Economists estimate that Banco de Mexico (Banxico) will lower rates by 25 basis points (bps) from 10.00% to 9.75%, though some analysts expect a 50 bps cut at the February 6 meeting.
  • Money market futures have priced in 54 bps of Fed rate cuts in 2025, according to CME FedWatch Tool data.

USD/MXN technical outlook: Mexican Peso treads water as USD/MXN approaches to year-to-date (YTD) high

The USD/MXN pair resumed to the upside after clearing the 50-day Simple Moving Average (SMA) at 20.38 since early trading during the Asian session. Trump’s tariff threats on Colombia weakened the Mexican Peso amid a risk-averse scenario, as the Peso plunged to a four day low of 20.74.

If traders clear the USD/MXN record high of 20.90, buyers would be in charge and challenge the 21.00 mark. On further strength, the next resistance would be the March 8, 2022 peak at 21.46, ahead of the 22.00 figure.

Conversely, if USD/MXN falls below the 50-day SMA of 20.38 and extends its losses toward the 100-day SMA at 20.06, bears could aim to push prices toward the 20.00 mark.

Mexican Peso FAQs

The Mexican Peso (MXN) is the most traded currency among its Latin American peers. Its value is broadly determined by the performance of the Mexican economy, the country’s central bank’s policy, the amount of foreign investment in the country and even the levels of remittances sent by Mexicans who live abroad, particularly in the United States. Geopolitical trends can also move MXN: for example, the process of nearshoring – or the decision by some firms to relocate manufacturing capacity and supply chains closer to their home countries – is also seen as a catalyst for the Mexican currency as the country is considered a key manufacturing hub in the American continent. Another catalyst for MXN is Oil prices as Mexico is a key exporter of the commodity.

The main objective of Mexico’s central bank, also known as Banxico, is to maintain inflation at low and stable levels (at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%). To this end, the bank sets an appropriate level of interest rates. When inflation is too high, Banxico will attempt to tame it by raising interest rates, making it more expensive for households and businesses to borrow money, thus cooling demand and the overall 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.

Macroeconomic data releases are key to assess the state of the economy and can have an impact on the Mexican Peso (MXN) valuation. A strong Mexican economy, based on high economic growth, low unemployment and high confidence is good for MXN. Not only does it attract more foreign investment but it may encourage the Bank of Mexico (Banxico) to increase interest rates, particularly if this strength comes together with elevated inflation. However, if economic data is weak, MXN is likely to depreciate.

As an emerging-market currency, the Mexican Peso (MXN) tends to strive during risk-on periods, or when investors perceive that broader market risks are low and thus are eager to engage with investments that carry a higher risk. Conversely, MXN tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.