Mexican Peso Hits Peak and Falls Amid Global Trade Concerns

Automotive Author: Notrice May 16, 2024 06:13 PM (GMT+8)

May 14, the Mexican Peso (MXN) encountered resistance during its upward movement on Tuesday and subsequently fell back. This may be due to increasing concerns about global trade fragmentation, which particularly affects export-based emerging market economies like Mexico.


Specifically, the recent weakening of the MXN against the USD is attributed to rising US inflation expectations. This could lead to US interest rates remaining high for an extended period, thereby attracting more capital inflows into the United States.

The primary reason for the MXN losing its upward momentum is geopolitical concerns. After the IMF warned that global economic growth could lose momentum due to geopolitical-induced fragmentation of international trade, the MXN fell on Monday.

Gita Gopinath, the IMF's First Deputy Managing Director, stated in a speech at the Stanford Institute for Economic Policy Research, "Countries are reassessing their trade partners based on economic and national security considerations." She added that if this trend continues, "we could see a widespread retreat from global engagement rules, leading to a significant reversal of economic integration gains."

In recent years, countries like the US and those in Europe have further implemented protectionist policies. The US policy of imposing fourfold tariffs on Chinese electric vehicles, along with the BRICS countries' continued efforts to weaken the USD's dominance, exemplify this trend. For instance, in early May, India and Nigeria agreed to settle all trade using their local currencies instead of the USD. Before this, other countries, notably China, Russia, and Iran, reached similar agreements aimed at circumventing Western sanctions.

US inflation expectations are rising, causing a rebound in the USD/MXN exchange rate. Data from the New York Federal Reserve indicated increasing inflation expectations, reinforcing the inflation outlook from last Friday's University of Michigan consumer confidence survey. The USD rose against most currencies, including the MXN. The New York consumer expectation survey showed that inflation expectations for the coming year rose to 3.3% in April from 3.0% in March, after being 3.0% for the previous three months. This is the highest level since November and well above the Federal Reserve's 2.0% target.

These data further diminish the likelihood of the Federal Reserve cutting interest rates in the near term, which is positive for the USD, as higher interest rate expectations attract more foreign capital inflows.