Given the price movements of the Mexican peso in the last month, you must respect Mexico and its currency. On the back of US tariffs, the Mexican peso should be getting slaughtered. Mexico’s exposure to the US supply chain for industries like autos puts it right in the cross hairs of tariffs, no escape.
Tariffs were originally announced beginning February, and Mexico was given a 30-day reprieve. When tariffs became an issue again on March 3rd, the currency had weakened to a level of 20.73, a level very near its one-year low point.
Between March 3rd and April 4th, the peso strengthened by over 3% versus the US dollar as tariff talks calmed down.
But, since the announcement of President Trump’s steroidal tariff program, the Mexican Peso has weakened versus the US dollar back to the March 3rd level of 20.73, the level when investors viewed tariffs as a big threat.
Confusing, hard to follow. I know.
What is surprising is the fact that it never weakened past its lowest value in the last year. It never passed its weakest point of 20.85.
Who would have thought that it could stay above its low point with things looking so grim. In times past the Mexican peso would have gone way down in value in tandem with other emerging market currencies.
Impressive Mexican peso performance can be explained by many things, but the interest rate differential with the United States may be the most important.
At the time of the peso’s weak point on March 3rd, Etherfuse’s Mexican stable bonds, CETES, were yielding 3.5% more than US dollar stable bonds. As noted earlier, this 3.5% was a cushion, an added return to compensate investors for taking the risk of owning pesos versus the US dollar.
It was good compensation for peso risk because about one month later the currency is unchanged from its low point of 20.73 on March 3rd, . Not great performance at first glance, but on an annual basis if nothing changes between the US dollar and the peso, investors will still make about 3.5% more yield on peso stable bonds than on US stable bonds.
If the dollar goes down further, which is possible, the gain would be even more.
So, the key question to ask right now is will the value of the peso weaken by more than 3% versus the US dollar in the next months? If this happens, currency weakness can wipe out any annual interest rate gain.
So far this has not happened. So far, it may be concluded that the worst is over for Mexico and the peso. They may have weathered the storm nicely.
If the US dollar weakens, the peso trade is great. If the Mexican peso does nothing from this level, stays unchanged, the trade is still good on an annual basis.
Regarding the US dollar, there are few positives going for it, so at a minimum it could stay at this level, unchanged.
A trade borrowing US dollar stable bonds to finance the purchase of Mexican stable bonds could be a good idea, providing a 3.5% yield pick-up on an annual basis.
But whatever the trade, the key is to watch the peso level of 21.5 to the US dollar, a level that reflects over 3% weakness versus the US dollar at the present time April 8, 2025. If the peso goes to 21.5, the trade doesn’t work.
But, in the end, remember, if nothing changes, all is good.
Whatever happens, you have to respect the peso and Mexico. In times past, a crisis of this magnitude would have crushed the Mexican peso. It has done well, so far, and should be proud.
This blog is for educational and informational purposes only, covering general market trends, industry developments, and asset features. Nothing herein is investment advice, a solicitation, or a recommendation to buy or sell any assets. Etherfuse and its guests may hold stakes in some or all of the assets discussed.
