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USD/MXN rallies to 20.70-20.75 on Trump’s tariff plans, remains close to multi-year top

  • UZD/MXN catches aggressive bids on Tuesday in reaction to Trump’s tariff remarks.
  • A goodish USD recovery from a two-week low lends additional support to the pair.
  • Bets that the Fed will cut rates twice in 2025 caps gains for the buck and the major.

The USD/MXN pair regains positive traction during the Asian session on Tuesday and remains close to its highest level since July 2022 touched last week. Spot prices currently trade around the 20.70-20.75 area, up over 1.0% for the day, in the wake of US President Donald Trump's tariff remarks and resurgent US Dollar (USD) demand. 

The Mexican Peso (MXN) weakens after Trump said this Tuesday that he intends 25% tariffs on Canada and Mexico, and the target date for tariffs would be as soon as early February. This comes on top of overnight dovish comments from Banco de Mexico (Banxico) Deputy Governor Jonathan Heath, saying that headline and core inflation rates will likely land below 4% in January. Heath added that the bank does not need to exaggerate a restrictive posture, which, along with the emergence of some USD buying provides a goodish lift to the USD/MXN pair.

The USD Index, which tracks the Greenback against a basket of currencies, rebounds swiftly from a two-week low touched on Monday amid worries that Trump's protectionist policies would reignite inflationary pressures. Furthermore, Trump's comments revived trade war fears and further benefits the safe-haven buck. That said, the recent signs of abating inflation in the US lifted market bets that the Federal Reserve (Fed) will cut interest rates twice this year. This, in turn, caps any further appreciating move for the buck and the USD/MXN pair.

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.

Author

Haresh Menghani

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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