- Mexican Peso tumbles for the fourth-straight day as US trade policies damage Mexico’s economy.
- Banxico slashes rates by 50 bps and signals additional cuts amid recession risks.
- US recession odds rise as Chicago PMI remains contractionary despite slight gains.
The Mexican Peso (MXN) begins the week on the back foot against the US Dollar (USD), mainly due to a deteriorating risk appetite as investors brace for the release of US tariffs on April 2, the US Liberation Day. At the time of writing, the USD/MXN trades at 20.45, up 0.50%.
Tariffs continue to drive price action as investors shifted to a risk-averse stance, which also weighs on high-beta currencies like the Mexican Peso. Last week, Banco de Mexico (Banxico) reduced rates by 50 basis points (bps) to 9%, while hinting that a further cut of the same magnitude looms.
Regarding this, JP Morgan supports another 50 bps cut due to the risks of an imminent recession, according to Steven Palacio, an analyst at the bank.
“It’s inevitable that Mexico will go through a recession because the tariffs and the uncertainty surrounding their implementation are occurring in an economic context that was already in sharp decline,” Palacio said.
Meanwhile, Banxico’s Governor, Victoria Rodriguez Ceja, said the central bank will remain attentive to US trade policies and their impact on the country, with a primary focus on inflation, as she stated in an interview with El Financiero.
Across the northern border, the Chicago PMI data improved but remained in contractionary territory for the sixteenth consecutive month. The Greenback shrugged off an increase of recession odds in the US, according to Goldman Sachs, with odds rising from 20% to 35% due to pessimism amongst households and businesses. White House comments that the administration will tolerate an economic slowdown did not help.
This week, the Mexican economic schedule will feature Business Confidence, S&P Global Manufacturing PMI, and Gross Fixed Investment figures. In the US, traders are focusing on the April 2 Trump tariff announcement, the ISM Manufacturing PMI for March, JOLTS Job Openings and Nonfarm Payrolls.
Daily digest market movers: Mexican Peso falls as Banxico’s signals more cuts coming
- Mexico’s Business Confidence in February was 50.4. A reading below that level would indicate that companies are becoming pessimistic about the economy, with the result being its lowest level since May 2021.
- S&P Global Manufacturing PMI remained in contractionary territory for eight straight months at 47.6 in February. A March print beneath this would suggest the economic slowdown is deeper than foreseen.
- The Chicago PMI data for March increased by 47.6 points from 45.5 and exceeded the forecast of 45.2.
- Traders had priced the Fed to ease policy by 75 basis points (bps) throughout the year, according to data from the Chicago Board of Trade.
USD/MXN technical outlook: Mexican Peso treads water as USD/MXN bulls target 20.50
The USD/MXN continues to gather steam after clearing the confluence of the 100 and 50-day Simple Moving Averages (SMAs) near 20.35/36, which paved the way for 20.47, a new two-week high. The Relative Strength Index (RSI) indicates that buyers remain in control, with sufficient room to drive the exchange rate higher.
Therefore, the USD/MXN first resistance would be 20.50. If surpassed, the next ceiling would be the March 4 peak of 20.99, followed by the year-to-date (YTD) high of 21.28. Conversely, a drop below 20.35/36 paves the way to test the 20.00 mark.
Tariffs FAQs
Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.
Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.
There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.
During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.
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