Tariffs Hit Mexican Peso as US Risks Shield Other EM Currencies

As the U.S.-Mexico trade relationship continues to evolve, investors are keeping a close eye on the potential impacts of U.S. trade policies, such as tariffs, on the Mexican peso and other emerging market currencies. In this article, we'll explore how tariffs have specifically impacted the Mexican peso's exchange rate and volatility compared to other emerging market currencies, and discuss the underlying economic factors that make the Mexican peso more susceptible to tariff-related risks.



First, let's examine the data on the Mexican peso's exchange rate and volatility in response to tariffs. According to data from the Bank of Mexico, the Mexican peso has experienced periods of depreciation and increased volatility following announcements of U.S. tariffs on Mexican goods. For instance, in 2018, the Mexican peso depreciated by around 10% against the U.S. dollar following the U.S. administration's threat to impose tariffs on Mexican goods. This reaction was more pronounced than the depreciation experienced by other emerging market currencies, such as the Brazilian real or the South African rand, which depreciated by around 5% and 3%, respectively, during the same period.



Several underlying economic factors contribute to the Mexican peso's heightened sensitivity to tariff-related risks:

1. Trade Dependency: Mexico is heavily dependent on trade with the United States, with the U.S. being its top trading partner. In 2023, total two-way goods trade between the U.S. and Mexico reached $799 billion. This high level of trade dependency makes the Mexican economy and its currency more vulnerable to changes in U.S. trade policies, including tariffs.
2. Integration of Supply Chains: The U.S. and Mexico have closely integrated supply chains, which power their economies and strengthen their global competitiveness. Any disruption in these supply chains due to tariffs or other trade barriers can significantly impact the Mexican economy and the value of the peso.
3. Remittances: Remittances from Mexican workers in the U.S. play a crucial role in the Mexican economy. In 2023, remittances from the U.S. to Mexico reached an all-time high of $59.1 billion. Any changes in U.S. immigration policies or economic conditions that affect remittances can have a significant impact on the Mexican economy and the peso.
4. Fiscal and Current Account Deficits: Mexico has persistent fiscal and current account deficits, which make its economy more vulnerable to external shocks. In 2023, Mexico's current account deficit was around 2.5% of GDP. A widening of this deficit due to tariffs or other trade barriers could lead to a depreciation of the peso.
5. Inflation and Interest Rates: Mexico's inflation rate has been relatively high compared to other emerging markets, and the central bank has had to raise interest rates to combat it. Higher interest rates make the peso more attractive to foreign investors, but they also make the economy more sensitive to external shocks, such as tariffs.

In conclusion, the Mexican peso has been more susceptible to tariff-related risks than other emerging market currencies due to its high trade dependency, integrated supply chains, and other underlying economic factors. As the U.S.-Mexico trade relationship continues to evolve, investors should closely monitor the potential impacts of U.S. trade policies on the Mexican peso and other emerging market currencies. By understanding the specific challenges faced by the Mexican economy, investors can make more informed decisions about their portfolios and better navigate the risks associated with tariffs and other trade barriers.