The Mexican Peso Surges as US Tariffs on Mexico Are Delayed
The Mexican peso led a rebound in risk currencies after news broke that the United States would postpone tariffs on Mexico for one month. The peso, which had fallen as much as 3% overnight, gained more than 1% against the US dollar after Mexican President Claudia Sheinbaum announced the postponement following a conversation with Donald Trump on Monday. Trump confirmed the information on social media, adding that he anticipated further negotiations.
The Bloomberg Dollar Spot Index erased its gains and traded virtually unchanged. Canada's dollar recovered from losses of up to 1.7% against the US dollar, settling down just 0.4% to 1.4593. Emerging market currencies and stocks, which had suffered their sharpest declines since Trump secured a second term in November, also rebounded.
"With Trump, it's difficult for narratives to hold for even 24 hours before a reversal," said Jordan Rochester, head of FICC strategy at Mizuho Bank Ltd. "This market assumes some implications for Canada, but their own tariffs against the US have complicated matters."
The threat of a trade war, which intensified over the weekend with Trump's announcements of levies on Mexico, Canada, and China, had prompted investors to pile into bullish dollar positions, betting that the tariffs would stoke inflation and limit the Federal Reserve's scope for interest rate cuts.
Import tariffs into the US can reduce the flow of dollars overseas, potentially bolstering the currency. The dollar has surged roughly 4.5% since Trump's election victory in November.
After Trump ordered 25% tariffs on Mexican exports on Saturday, Sheinbaum said she was instructing her economy minister to respond with tariffs and non-tariff measures, without providing specifics. On Monday, she reported reaching several agreements with Trump, with both nations set to begin working on trade and security.
"This aligns with a broader market bias that favors viewing tariffs as a negotiating tactic rather than a serious threat," said Nick Rees, head of macro research at Monex Europe Ltd. in London. "A deal was achievable with Mexico, but it will be much harder for Canada."
Shares in the $1.3 billion iShares MSCI Mexico ETF jumped 2.2% to $50.6 per share, recovering from a loss of up to 3.45%. The local stock market remained closed for a holiday.
The South African rand also trimmed its losses as global risk appetite improved. However, the currency is likely to face continued pressure due to Trump's pledge to halt funding to the country over a land expropriation law.
The offshore Chinese yuan also pared an earlier decline, trading down about 0.1% against the dollar, despite Trump's lack of updates on whether his 10% tariff on Chinese goods would be postponed.
"Risks remain twofold: a market that cries wolf too often could eventually face consequences, and even if a truce is reached, repeated episodes of volatility could weigh on investment sentiment in both markets and the real economy," said Alejandro Cuadrado, global head of FX at BBVA in New York.
Trump's policy swings are likely to continue driving volatility in risk assets. A JPMorgan Chase & Co. gauge of global foreign-exchange volatility spiked to 8.37%, the highest since January 22.
"We don't believe the peso's reprieve will last," said Aroop Chatterjee, a strategist at Wells Fargo in New York. "It's a matter of when, not if, tariffs escalate, and markets remain severely underpriced for that outcome."