- The Mexican Peso weakens as uncertainty over future trade relations with the US and the potential imposition of tariffs weigh on sentiment.
- The looming threat of large-scale deportations of Mexican immigrants could further dampen remittance inflows and reduce demand for the MXN.
- The USD/MXN pair rebounds from the lower end of a rising channel, signaling the potential continuation of its upward trend.
The Mexican Peso (MXN) continues to lose ground across its major pairs, extending its decline into a third consecutive day on Tuesday. Investor concerns about the potential impact of President-elect Donald Trump’s policy agenda on the Mexican economy are a significant driver of the Peso's depreciation. Additionally, expectations that the Bank of Mexico (Banxico) may proceed with a quarter-point interest rate cut at its upcoming meeting on Thursday, combined with the strength of the US Dollar (USD), are weighing on the Peso.
Peso Declines Amid Uncertainty Over Trump’s Policies Toward Mexico
The Mexican Peso is under pressure as markets assess the implications of Trump’s proposed policies on Mexico, particularly regarding trade relations, immigration, the war on drugs, and the changes to Mexico’s judiciary under the Morena-led government.
Despite the existing United States-Mexico-Canada Agreement (USMCA), which is in effect until 2026, recent constitutional changes in Mexico, including controversial judicial reforms that would elect judges by popular vote rather than appoint them, could put Mexico at odds with the agreement. This raises the possibility that Trump might push for an early renegotiation, according to El Financiero.
On Friday, the Peso slumped nearly 2.0% in a single day after the Financial Times reported that Trump had offered Washington lawyer Robert Lighthizer the role of US trade chief. While the report was later denied by Reuters, which cited a White House source calling it "untrue," the prospect of Lighthizer, a well-known protectionist, taking the job remains a potential risk for the Peso.
The Peso is also facing downward pressure as it becomes increasingly likely that Trump will follow through on his pledge to deport millions of undocumented migrants, many of whom are Mexican. Trump has already appointed immigration hardliner Tom Homan as "Border Czar" to oversee the mass deportations.
Such a policy could disrupt remittance flows from Mexican workers in the US, many of whom are employed in the informal economy and send significant amounts of money back to Mexico. A drop in remittances would reduce demand for the Peso. Additionally, the potential return of millions of migrants could create a supply shock in Mexico’s labor market, prompting Banxico to cut interest rates more aggressively. This would likely reduce foreign capital inflows, putting further pressure on the Peso.
The increasing possibility of a Republican majority in the US Congress, which would allow Trump to push forward with his radical policies, could also have negative implications for the Peso. The Associated Press reports that the Republicans have secured 214 seats, with 16 remaining to be called, while the threshold for a majority is 218.
El Financiero forecasts that a Republican-controlled Congress under Trump’s presidency could lead the Peso to weaken further, predicting a USD/MXN range between 21.14 and 22.26. Conversely, if the Republicans fail to win a majority, the pair is expected to trade between 19.70 and 21.14.
The Peso may experience additional volatility later this week as the Bank of Mexico (Banxico) holds its policy meeting on Thursday. While headline inflation came in higher than expected, core inflation dropped to 3.80% YoY in October, down from 3.91%, moving closer to Banxico's target of 3.0%. As a result, there is speculation that Banxico could implement a 0.25% rate cut, reducing the benchmark interest rate to 10.25%. A rate cut would be negative for the Peso, as lower interest rates typically result in reduced foreign capital inflows.
Technical Analysis: USD/MXN Continues to Trend Up
Technically, the USD/MXN pair is recovering from the lower end of its rising channel, suggesting the broader uptrend is intact.
USD/MXN 4-hour Chart
On the 4-hour chart, USD/MXN is in an uptrend across short, medium, and long timeframes, which suggests further upside potential.
A break above the November 11 high of 20.58 would lend further weight to the bullish short-term outlook.
For confirmation that the uptrend is resuming, traders should look for a break above the November 6 high of 20.80. Such a move would likely confirm more upside, with 21.00 as the next key target and resistance level, serving as both psychological support and technical resistance.
