Mexican Peso Tumbles Amid Trade Dispute Concerns
The Mexican peso experienced a significant decline on Monday due to concerns among investors regarding the potential impact of trade disputes on the markets. This apprehension stemmed from US President Donald Trump's announcement on Sunday that tariffs could be imposed on Colombian imports, primarily crude oil, coffee, and flowers.
The threat emerged after Bogota rejected US military planes transporting deportees. However, a late-night agreement between Colombian and US diplomats allowed Bogota to accept the deportees without facing tariffs.
Despite the resolution, market sentiment has shifted towards complacency about the threat of tariffs. Arif Joshi, co-head of emerging markets debt at Lazard Asset Management, highlighted that the recent events have reduced the likelihood of a gradual approach by the Trump Administration and underscored their ability to implement trade threats swiftly.
The Colombian peso initially dropped by 1.8% on Monday but later recovered, hovering near 4,200 per dollar, a decline of 0.65%. However, Wells Fargo analysts advised shorting the currency with a target of 4,600 per dollar, indicating a potential depreciation of nearly 9%.
The Mexican peso also suffered a sharp decline of 2.3% on Monday, eroding much of its gains for the year. This comes after a significant 20% drop in 2024. Mexico and Canada face a deadline of February 1st to address Trump's demands on border security and other issues, or they could face 25% tariffs on their exports to the US.
Graham Stock, senior sovereign strategist for emerging markets at RBC Global Asset Management, emphasized the increased perception of risk for tariffs. He noted that the Colombian peso's recovery highlights the potential for a return to normalcy if demands are met.
However, the Mexican peso was the most impacted due to the country's complex challenges, including immigration, drug cartel violence, trade deals, and illegal fentanyl shipments to the US.
The targeting of Colombia was unexpected given its long-standing relationship with the US and modest economic scale. President Gustavo Petro's leftist views and exchange of social media posts with Trump may have contributed to the situation.
Aaron Gifford, senior EM sovereign analyst at T. Rowe Price, suggests that the market is attempting to identify potential areas of conflict, with the Mexican peso declining more significantly than the Colombian peso.
While some investors remain cautiously optimistic about emerging market debt, they acknowledge the potential volatility if threatened tariffs materialize. Shamaila Khan, head of fixed income for Emerging Markets and Asia Pacific at UBS Asset Management, emphasizes the resilience of EM hard currency debt but cautions that further headlines on tariffs could trigger market reactions.