Mexican peso weakness may partially offset US tariffs

Spanish Market: Metals, Natural gas
01/04/25

Volatility in the peso/dollar exchange rate may help to partially offset any tariffs that US President Donald Trump decides to impose on imports from Mexico as the ensuing peso depreciation would make its exports more competitive, said analysts from US bank Barclays.

President Trump will announce Wednesday his next decision related to the threat to impose a 25pc tariff against imports from its commercial partners Mexico and Canada. Trump has delayed the decision twice, and it is likely that he will do so again, given the serious repercussions the tariffs could cause to the US economy, said Latam chief economist at Barclays, Gabriel Casillas, during a webinar held Monday.

The base scenario for Barclays is that Trump's administration will finally step back from imposing tariffs on Mexico and Canada and rather go for an early renegotiation of the (US Mexico Canada Free Trade Agreement (USMCA) this year, said Casillas. In this scenario, the Mexican peso would strengthen to between Ps19.5 to Ps19.00 to the greenback, he added.

However, if Trump's administration decides to impose the 25pc tariffs on all Mexican imports as he has threatened to do, then the peso would weaken to Ps24/$1, said Erik Martinez, foreign exchange research Analyst at Barclays during the same webinar.

"If tariffs were imposed, 25 percent on all imports, we think a good portion of this would be absorbed by the exchange rate," said Casillas. A weaker peso makes Mexican exports more competitive abroad.

The Mexican peso on Tuesday was trading at around Ps20.30 to the dollar, and has weakened by 18.5pc in the past year from about Ps16.6 to the dollar a year ago.

If President Claudia Sheinbaum's administration avoids the tariffs, the peso may strengthen to around Ps 19.00/$1 in upcoming days, said Martinez. If the tariffs are applied during a brief period or only for the automobile sector, the exchange rate could range between Ps21.00-22.00 per dollar, said Martinez.

However, even without any tariff being applied, Mexico's economy is expected to grow only by around 0.7pc this year, less than the estimates made late in 2024 of around 1.4pc, due to the deceleration of the US economy, Mexico's main trading partner, said Casillas.

The US economy is showing signs of slowing down, specially in the industrial sector, which will impact Mexico's growth for the year. Also, this uncertainty is directly affecting any upside expected from so-called nearshoring as companies would now lose interest in moving their manufacturing lines to Mexico if there is no clear benefit in using the USMCA to avoid tariffs, said Casillas.

By Édgar Sígler

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07/04/25

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04/04/25

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