At the start of March, the White House announced that President Trump would be imposing a 25% tariff on goods imported the United States’ two neighbours, Canada and Mexico. Implemented under the International Emergency Economic Powers Act (IEEPA), the Trump administration stated that the trade barriers were a response to the countries’ failure “to curb the dangerous cartel activity and influx of lethal drugs” flowing into the US.
However, just a few days later, Trump announced that he would exempt a range of goods from these tariffs. The President initially said that carmakers would not be subject to the 25% levy, before it then became clear that all goods compliant with the terms of the US-Mexico-Canada agreement (UMSCA), which Trump signed during his first term in office, would be tariff-free until April, when the decision will be reviewed.
While this still leaves around 50% of US imports from Mexico subject to tariffs, the de-escalation helped calm fears of an all-out trade war between the US and Mexico. Positive noises from Mexican President Claudia Sheinbaum, who pledged to work closely with her counterparts in the US to curb the flow of drugs across the border, also helped placate tensions.
However, this volatility spell had an immediate impact on financial markets, especially foreign exchange markets. The Mexican peso dropped by as much as 1.5% in the hours after Trump’s tariff announcement, before clawing back into the green after US Commerce Secretary Howard Lutnick struck a less aggressive tone.
The peso has already weakened considerably in the last twelve months. The currency has lost more than a fifth of its value compared to the dollar since last April, given the impact both of US trade policy and domestic political and economic trends. How likely is a further depreciation in value in 2025?
Primary among the risks for the peso is, of course, an escalation in Trump’s tariff war, which he appears set on pursuing in a bid to rectify both the US’ massive trade deficit and to force other nations to comply with other policy priorities. Mexico is a highly trade-dependent economy and send around 80% of its exports to the US.
Many analysts believe the tariffs Trump has imposed will be temporary. JPMorgan has argued that the trade barriers will only be in place for a short period of time, during which the peso could trade in a range of 4% weaker to 2% stronger.
However, others disagree. The global law firm White & Case has advised to “expect retaliation and further tariff increases.” An increase in either the tariff itself, or the scope of goods subject to tariffs, would be likely to send immediate shockwaves through peso markets and to prompt a further devaluation.
There are further risks for the peso, unrelated to trade policy. For one, recent economic data released in Mexico showed that spending plunged in the last quarter of 2024, while a preliminary forecast suggests that the economy contracted last month. The Organization for Economic Cooperation and Development (OECD) has estimated that Mexico’s GDP will contract by 1.3% this year and by a further 0.6% in 2026, putting the country into recession territory.
While inflation in the country continues to be above the central bank’s target of 3% – the latest reading in February showed prices rising at a rate of 3.77% – traders are now expecting the Banco de Mexico to move faster in cutting interest rates in a bid to stimulate economic activity and avert a recession.
Indeed, a Reuters poll taken last week showed a strong majority of economists expect the central bank to deliver a rate cut of 50 basis points, as it also did in February, when it next meets on March 27th. This would take the benchmark interest rate down to 9% from a record high of 11.25% in 2024. Looser monetary policy can cause the foreign exchange rate to weaken as traders seek higher-yielding currencies elsewhere.
Much will depend on whether central bank officials in the US also seek to cut rates, however it seems they are unlikely to do so. The Chairman of the Federal Reserve, Jay Powell, said last week that the US central bank is “not going to be in any hurry to move,” while the New York Fed President John Williams said that the existing, tighter approach to monetary policy is “entirely appropriate.” This highly suggests that the benchmark rate will remain at the current 4.25-4.5% level for the foreseeable future. CME Group data suggests the market is pricing in a 99% chance that the Fed will keep its interest rate unchanged.
Trump’s tariffs, which raise the cost of imported goods and therefore potentially feed into higher inflation, mean it is likely that the Fed will keep rates steady in order to avoid encouraging another round of runaway inflation. Indeed, the latest projections from the Fed reveal they expect higher inflation and lower economic growth in 2025, although JPMorgan still expect some rate cuts to start by the end of the year. This should in turn feed into a stronger dollar for the remainder of the year, at the expense both of the Mexican peso and emerging market currencies around the world.
Given these trends, the Mexican bank Banamex has forecast that USD/MXN could weak to 21 pesos to the dollar from its current level of 20.23. Goldman Sachs has revised its growth forecast for Mexico this year downward, from 0.3% to zero, which would likely be reflected in a weaker currency. However, much will depend on the extent to which the US president pursues the aggressive trade policy he advocates in practice.
Author: Harry Clynch
#Mexico #MexicanPeso #MXN #ForeignExchange #USDollar
See Also:
How Strong Will the Canadian Dollar Be in 2025? | Disruption Banking
Mexican Peso Faces New Challenges In 2025 With Trump’s Presidency | Disruption Banking
How Strong Will The Mexican Peso (MXN) Be In 2024? | Disruption Banking
