The Mexican Peso (MXN) has weakened following U.S. President Donald Trump's announcement of his intention to impose 25% tariffs on Canada and Mexico. This development has added pressure on the already volatile currency market. The USD/MXN pair experienced positive traction during the Asian session on Tuesday, maintaining proximity to its highest level since July 2022, a position it reached last week. This movement highlights the sensitivity of the Mexican Peso to geopolitical trends, including trade war fears and protectionist policies.
Macroeconomic data releases are crucial in assessing the economy's state and can significantly impact the Mexican Peso's valuation. As a highly traded currency among its Latin American peers, MXN's value is broadly determined by several factors. These include the performance of the Mexican economy, central bank policies, foreign investment levels, and remittances sent by Mexicans living abroad, particularly in the United States.
Interest rates play a pivotal role in shaping the currency's strength. Higher interest rates generally support the Mexican Peso, as they lead to higher yields, making Mexico an attractive destination for investors. Conversely, lower interest rates tend to weaken the MXN. Banxico, Mexico's central bank, aims to maintain inflation at low and stable levels, targeting a 3% midpoint within a tolerance band of 2% to 4%. When inflation becomes too high, Banxico may raise interest rates to curb excess demand and cool down the economy.
The Mexican Peso thrives during risk-on periods when investors perceive broader market risks as low and are eager to engage with higher-risk investments. Oil prices also serve as a catalyst for the MXN due to Mexico's status as a key exporter of the commodity. Additionally, Mexico's position as a major manufacturing hub in the American continent makes it a beneficiary of nearshoring, further influencing the currency's performance.
The recent rally in the USD/MXN pair is influenced by the performance of the USD Index, which tracks the Greenback against a basket of currencies. As global trade dynamics shift and protectionist measures loom, the Mexican Peso finds itself navigating a complex landscape.
A strong Mexican economy, characterized by high economic growth, low unemployment, and high confidence levels, is beneficial for the Mexican Peso. However, these factors are currently challenged by external pressures such as potential tariffs and fluctuating oil prices. The currency remains sensitive to changes in these dynamics, reflecting broader market sentiments.