Mexican Peso strengthens as trade war risks ease

The Mexican Peso (MXN) rallied nearly 1.5% on Thursday against its most-traded pairs, as fears of a potential trade war between the United States and Mexico subsided. This rebound recovers losses from earlier in the week, triggered by President-elect Donald Trump’s announcement of a proposed 25% tariff on Mexican and Canadian imports. Trump tied these tariffs to demands for stronger measures against illegal immigration and drug trafficking into the US, raising concerns about a significant impact on Mexican exports.

In response, Mexican President Claudia Sheinbaum warned that Mexico would impose retaliatory tariffs if such levies were enacted. She highlighted that Mexico had already reduced illegal immigration by 75% in 2024 and was intensifying efforts to dismantle drug cartels smuggling fentanyl into the US. However, she also pointed out that these cartels were being armed with US-made weapons. Sheinbaum argued that a trade war would inflict substantial harm on both economies.

By Wednesday, the Peso stabilized after Trump appeared to soften his stance. On Truth Social, Trump described a “wonderful conversation” with Sheinbaum, suggesting the tariffs could be averted. According to Lallalit Srijandorn of HubTrading, Trump claimed Sheinbaum agreed to halt migration through Mexico, effectively closing the US southern border, and discussed strategies to address drug inflows and US consumption.

Sheinbaum echoed Trump’s optimism, initially describing their discussion as “excellent” in a post on X (formerly Twitter). She highlighted Mexico’s efforts to manage migration effectively within its borders but later emphasized that Mexico’s position remains focused on addressing migration while respecting human rights.

Trade War Risks Draw Criticism

Trump’s initial tariff threats were met with widespread criticism from Mexico, Canada, and institutional analysts. Barclays noted that a 25% tariff on imports from Canada and Mexico could devastate the auto industry, potentially wiping out profits for Detroit’s automakers. Mexico’s Economy Minister Marcelo Ebrard estimated the tariffs could cost the US 400,000 jobs, calling them “a shot in the foot” for the American economy.

Mexico’s vulnerability was exacerbated by recent reforms under the Morena-led government that violated clauses of the US-Mexico-Canada Agreement (USMCA), risking the annulment of the trade deal. However, Mexico’s Congress has since proposed revisions to ensure compliance, particularly for antitrust and telecommunications regulators. Analysts, including Rodolfo Ramos of Bradesco BBI, viewed this cautious approach as a positive step toward restoring trade stability.

Outlook for the Mexican Peso

With tensions easing and proposed trade deal adjustments underway, the Mexican Peso has regained its footing. While uncertainties remain, the collaborative tone between leaders of both nations has offered hope for a resolution that minimizes economic disruption on both sides of the border.

Technical Analysis: USD/MXN Retreats Within Range

USD/MXN has pulled back after testing the upper boundary of a narrow trading range established in November.

USD/MXN 4-hour Chart 

The pair remains range-bound in the short term, oscillating between resistance at 20.80 and support levels at 20.06, 19.90, and 19.70.

Momentum indicators, such as the Moving Average Divergence Convergence (MACD), support the current downward move, with the MACD line crossing below its signal line—a reliable signal in sideways markets.

While USD/MXN remains in a longer-term uptrend, a decisive break above 20.80 is required to signal a bullish short-term trend aligned with broader market cycles. For now, the pair is likely to continue consolidating within its established range.