The Mexican Peso (MXN) has experienced a significant drop, plummeting by 1.79% amid escalating trade tensions, with the currency nearing the 21.00 mark. This decline in the Peso comes as the USD/MXN pair retraced its earlier move, falling just shy of the 21.00 level. If this threshold had been cleared, it could have exposed the year-to-date (YTD) peak of 21.28. This currency movement underscores the impact of heightened trade disputes on the financial markets.
The Mexican Peso is known to perform well during periods of low perceived market risk when investors are inclined towards investments carrying higher risks. However, the current climate of uncertainty has reversed this trend. Mexico's central bank, Banxico, plays a crucial role in maintaining the stability of the Peso by keeping inflation at low and stable levels. The central bank aims for an inflation rate close to 3%, the midpoint of its tolerance band of 2% to 4%.
Higher interest rates are generally favorable for the Peso, as they lead to higher yields, attracting more foreign investments into the country. A robust Mexican economy characterized by high economic growth, low unemployment, and strong consumer confidence also supports the Peso. As the most traded currency among its Latin American counterparts, the Peso's value is influenced by multiple factors including the performance of Mexico's economy, central bank policies, foreign investments, and remittances from Mexicans living abroad.
The Peso's role as a key manufacturing hub in the Americas further cements its importance in international trade. The nearshoring trend, where companies relocate manufacturing and supply chains closer to home countries, serves as a catalyst for strengthening the Peso. Additionally, as a major oil exporter, fluctuations in oil prices also impact the currency's value.
Despite these catalysts, predictions indicate that the Peso will depreciate in 2026, surpassing the 21.30 level anticipated in a January poll. Economists now forecast that the USD/MXN exchange rate will close at 20.85 in 2025, slightly lower than the previous projection of 20.90. These forecasts reflect broader economic conditions and investor sentiments.
The Atlanta Fed GDP Now model predicts a sharp slowdown in the U.S. GDP for Q1 2025, with a contraction of -2.8%. This economic downturn is mirrored by a contraction in business activity within the U.S., as indicated by the S&P Global Manufacturing PMI, which fell from 49.1 to 47.6 last month. Such economic indicators highlight potential challenges for Mexico's economy and subsequently, its currency.