Well, it happened, tariffs on Mexico and Canada were announced by the United States. While there is some uncertainty as to what will be tariffed, like Canadian oil, tariffs were announced, and currencies reacted as expected.
The Mexican currency went down about 1. 67% after the announcement and has stayed roughly at that level.
The key question is what will happen from here to the Mexican peso?
And what does this mean for investors considering Mexican bond investments?
When an event like this occurs, the worst position a country can be in is experiencing high inflation, rising interest rates, and a weakening currency. Currency weakness against the US dollar, with interest rate levels that do not stop currency weakness is the worst position a country can be in.
In such a case, interest rates are going up due to inflation, but inflation continues going up due to the currency going down. When the currency falls, imported goods become more expensive and support inflation
It is a vicious circle, and can be a prelude to a full-blown currency crisis, an out-of-control devaluation.
This is not the case in Mexico.
The currency got a lot of its weakness out of the way in 2024, with 20% depreciation versus the US dollar.
Year to date, prior to the tariff announcement, it was unchanged against the US dollar.
US tariffs were telegraphed, so most of the Mexican peso selling may have taken place in 2024.
Mexico’s reality is that inflation has been going down, interest rates are being reduced, and the currency has already weakened a lot over the last months. Declining inflation gives Mexico options regarding interest rate policies designed to deal with tariffs.
They have room to maneuver.
They are positioned to cut rates due to inflation and economic growth slowing, but they DO NOT HAVE TO CUT.
Not cutting interest rates can mitigate currency weakness.
In the end, Mexico has options to avoid a currency catastrophe.
The key question is what an investor should do when thinking about Mexican bonds.
Mexican CETES are offering an APY of about 8-9%. Dollar based US government bonds are offering between 4 and 4.5%.
If you are a dollar investor, either remittance based or investor based, the CETES offers a pretty good cushion against a fall in the Peso. For US Investors the Mexican peso would have to fall between 4 and 4.5% from this level for returns in USD to be the same.
A Euro investor would have to see the currency fall more than 5% against the Euro.
Tariffs have been telegraphed, so many who want to be out of the currency have probably already sold. Thus, the yield pickup for both US and European investors seems sound.
In the end, Mexico’s economic indicators, like inflation and interest rates, are in pretty good shape.
There are risks, but if an investor invests short-term for the yield pickup and things get worse, they are not locked in.
Flexibility to change your investment and the yield pick up makes short-maturity CETES look good.
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.
