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Mexican peso heads for torrid times in the wake of Trump's tariffs

Publication Date: 06 Jun 2019 - By ReachX T. By ReachX T.
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Environmental, Social & Governance FX & Rates FX Latin America

The Mexican peso is heading for troubling times in the wake of US President Donald Trump’s decision to slap tariffs on exports from the country to the United States. 

Last month, the President took to Twitter to announce a 5% tariff on all Mexican imports to the US that would take effect on 10 June. The tariff would then rise by 5% each month, with tariffs topping out at 25% by October in response to “illegal immigration issues.”

Commenting on the move, Per Hammarlund, Chief Emerging Markets Strategist at Nordic bank SEB, said the threat looks likely to become reality due to the short notice before it will be imposed on 10 June. 

“In addition, Trump also threatened to raise the tariff by 5% per month until it reaches a maximum of 25%. It caused the peso to weaken by 2.8% against the USD on Friday (31 May), and it will likely weaken further to around 19.94 versus the USD in the coming days if Trump does not soften the rhetoric.”

However, Hammarlund said the US is unlikely to lift tariffs to 25% as it would hurt American businesses and would have a noticeable impact on consumer prices, in particular on autos. 

“Nevertheless, if Mexican exports to the US face 25% duties, the Mexican economy would enter a recession and the peso would weaken to new record levels, with USD/MXN reaching 22–23 being well within reach.”

More broadly, while China has been the Trump administration’s main trade focus, Hammarlund added that any country or region with a large trade surplus with the US is likely to be a target of tariffs in the run-up to the US elections next year.

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This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

ReachX T.

 

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