Wells Fargo Warns U.S. Tariffs Could Drive Mexico into Recession, Peso Sell-Off

Wells Fargo has cautioned that the implementation of U.S. tariffs could drive Mexico into a recession, intensifying the risk of a sell-off in the Mexican peso. The bank highlighted that, despite being one of the more resilient emerging market currencies this year, the peso remains overvalued. The potential economic downturn in Mexico, fueled by widespread U.S. tariffs, could result in the country's GDP growing by only 0.1% this year. This economic strain could lead to a depreciation of the peso against the dollar, further complicating Mexico's economic landscape.

The bank's analysis underscores the delicate balance Mexico faces in the current global trade environment. The peso's recent strength, despite being overvalued, demonstrates the currency's resilience in the face of external pressures. However, the impending threat of U.S. tariffs poses a significant risk to Mexico's economic stability. The potential for a recession, coupled with the overvaluation of the peso, could trigger a wave of selling, further weakening the currency and exacerbating economic challenges.

Wells Fargo predicts that Mexico's economy could face a recession in the second quarter of this year and throughout 2025 due to the impact of U.S. tariffs. The bank's economist, Nick Bennenbroek, noted that while the tariff dynamics suggest a gradual depreciation of the peso, there is a high likelihood of a significant drop in its value. The delay in the implementation of U.S. tariffs and efforts by Mexican President Claudia Sheinbaum to improve relations with the U.S. have provided some support for the peso. However, if the U.S. proceeds with a 25% tariff on Mexican goods in early April, the economic recession could be more severe, leading to a sharp contraction in Mexico's economy in 2025.

Given the economic slowdown in Mexico, Wells Fargo advises the Mexican central bank to maintain a monetary easing stance. Bennenbroek stated that if the peso faces a sell-off, the central bank is unlikely to intervene in the foreign exchange market but will allow the peso to adjust according to changing economic fundamentals. The Mexican central bank recently lowered interest rates for the second consecutive time, in line with market expectations. As of the latest reports, the U.S. dollar has appreciated by 0.18% against the Mexican peso, trading at 20.31 pesos per dollar.