LatAm FX and Equities Rally: Navigating U.S. Trade Policy Shifts for Near-Term Gains

The Trump administration's 2025 trade policies toward Latin America—marked by tariff adjustments, USMCA compliance incentives, and corporate tax reforms—are creating a fertile environment for investors in the region's currencies and equities. While recent legal challenges and diplomatic tensions underscore the volatility of these policies, near-term opportunities are emerging for those attuned to shifting trade dynamics and sector-specific tailwinds.

FX Opportunities: Tariff Relief Fuels Currency Strength

The U.S. administration's gradual rollback of punitive tariffs, coupled with exemptions for USMCA-compliant goods, has injected confidence into LatAm currencies. Mexico, as the U.S.'s largest trading partner in the region, stands to gain most. The peso has already rallied this year as U.S. threats to impose 25% tariffs on Mexican goods were delayed in exchange for commitments to border security.

Beyond Mexico, Colombia and Peru are seeing currency appreciation as their agricultural and mining exports gain favor under relaxed trade terms. Colombia's peso has strengthened 5% year-to-date, driven by reduced U.S. tariffs on coffee and cut flowers. Peru's sol, meanwhile, has benefited from lower levies on copper—a key U.S. import—though investors should monitor the outcome of pending court cases challenging the tariffs' legality.

Equities: USMCA-Compliant Sectors Lead the Charge

Equity markets in LatAm are poised for gains in sectors aligned with U.S. trade priorities. The automotive industry, especially in Mexico and Colombia, is a prime beneficiary of the 85% regional content rule under USMCA. Companies like Mexico's Grupo Salinas (GSAB.MX) and Colombia's Avianca Holdings (AVHI) are well-positioned to capitalize on reduced trade barriers for vehicles and parts.

In commodities, Chile's mining giants such as Antofagasta (ANTO.L) and Peru's Southern Copper (SCCO) are gaining traction as U.S. tariffs on base metals ease. Meanwhile, Brazil's agribusiness firms, like J&F Investimentos, are seeing stronger demand for soybeans and poultry as U.S. buyers seek alternatives to Chinese imports.

Risks and Considerations

While the near-term outlook is positive, risks linger. Legal challenges to tariffs imposed under the International Emergency Economic Powers Act (IEEPA) could force abrupt policy reversals. Additionally, Trump's “Unleashing American Energy” executive order—which aims to eliminate EV incentives—threatens Mexico's $3 billion EV exports. Investors should favor companies with diversified revenue streams or hedging strategies.

Geopolitical risks also persist. Venezuela and Nicaragua face steep tariffs (15% and 18%, respectively), making their currencies vulnerable to capital flight. Investors should avoid overexposure to these markets until policy clarity emerges.

Investment Strategy: Target Sectors, Monitor Tariff Developments

1. Overweight Equities in USMCA-Compliant Sectors: Focus on Mexican automotive stocks and Colombian agricultural exporters. Consider ETFs like the iShares MSCI Mexico ETF (EWW) for broad exposure.
2. Selective FX Plays: Buy pesos and soles ahead of potential tariff reductions. Short the bolívar and córdoba due to elevated risks.
3. Commodity Plays: Allocate to copper and lithium miners in Chile and Peru, given their strategic importance to U.S. supply chains.

The Trump administration's trade calculus remains unpredictable, but investors who pair sector-specific insights with agility in navigating regulatory shifts can secure outsized returns in this dynamic market.