The USD/MXN exchange rate continued rising this week, reaching a high of 20.82 on Tuesday, its highest level since July 2022 and 27% above its lowest level this year. This performance makes the Mexican peso one of the worst-performing currencies, a trend that may continue amid a trade war with its biggest trading partner.
Donald Trump tariffs
The USD/MXN pair has been in a steady uptrend in the past few weeks. Its uptrend accelerated after Donald Trump reignited his threat of tariffs from top countries, including Mexico, the biggest trade partner.
In a statement, Trump said that he would sign a package of tariffs of about 25% of all goods entering the United States from Mexico. He attributed that threat to the immigration crisis that the US has faced before.
Such tariffs would have major implication on the two economies since Mexico will be forced to respond as well. The two countries do trade worth over $807 billion. The US exported goods worth $322 billion, while Mexico sold the US almost $500 billion worth of goods.
Still, there are a few reasons to be optimistic that Trump will not live up to these threats. First, Mexico is part of the USMCA deal that he signed into law. That deal was an update to NAFTA, which removed tariffs on most goods. As such, implementing large tariffs on Mexico could go against the treaty, which may attract legal action.
Second, imposing large tariffs on Mexico would worsen relations between the two countries and make the immigration crisis work. Mexico has done more work recently to handle the migration issue, which explains why the number of apprehensions at the border have fallen.
Therefore, Mexico may redirect funds used to crack down on migration to other areas, leading to more people at the border. Also, Trump needs the country to address the Remain in Mexico plan of dealing with migrants.
Additionally, these large tariffs would also hurt some of the biggest companies that Trump needs on his corner like General Motors and Ford. These are some of the top firms that do trade between the two countries.
Altogether, analysts believe that Trump’s threat of tariffs is his opening salvo for negotiations with Mexico and Canada.
Fed and Mexico interest rate divergence
The USD/MXN exchange rate has also done well after the divergent sentiment between the Fed and the Mexican central bank. In Mexico, the central bank has maintained a dovish tone after delivering several rate cuts. The bank has hinted that it will cut rates more in the coming months because of the deflation. The central bank governor said:
“Given the progress of disinflation, we believe that we can continue with the cuts to the reference rate and in the following meetings we will be assessing the inflationary outlook and making the corresponding decisions.”
The Fed, on the other hand, has turned a bit hawkish, hinting that the pace of rate cuts will be gradual. It has already slashed rates two times this year and analysts expect it to maintain status quo in its December meeting.
USD/MXN technical analysis
USD/MXN chart by TradingView
The weekly chart shows that the USD to MXN exchange rate has been in a strong uptrend in the past few days. It has rallied and moved to the key resistance level at 20.82, its highest level in July 2022.
The pair is approaching the 50% Fibonacci Retracement level. Also, it is about to form a golden cross pattern, which happens when the 50-week and 200-week moving averages cross each other.
However, the pair has formed a rising wedge pattern, which happens when an asset forms two rising converging trendlines.
Therefore, while more USD/MXN pair gains are possible, there is a likelihood that it will have a bearish breakout in the coming weeks. If this happens, the next point to watch will be at 20.
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