President Trump gave Mexico a reprieve from tariffs for thirty days at the beginning of February. This reprieve does not mean tariffs won’t happen. With all the inconsistencies and mixed messages coming out of Washington DC, it is hard to conclude anything.
So who or what can best assesses whether tariffs on Mexico come about or not? I think the peso us dollar market is the best predictor.
If the probability of US tariffs increases during this thirty day period, the Mexican peso will weaken against the USD.
So far, that has not happened to any extreme.
The peso weakened twice since the initial announcement of tariffs, but it is now .4% below its weakest point since the tariff drama got underway. If tariffs were such a threat, the peso would have gone through its recent low and kept going down.
It would have gone down in value a lot more than just under 1%
Are investors in denial? Are investors not paying attention to the peso situation? Or is there mounting evidence that severe tariffs won’t happen?
Let’s look at the information.
First, US inflation expectations are at their worst level since November 23, with year-ahead inflation expectations in the US at 4. 3%. High inflation expectations from US consumers can mitigate policy decisions that will be inflationary, like tariffs
Second, now the talk is about watered down tariffs, reciprocal tariffs where the US hits any country that charges a duty with the exact same tariff. Versus the previous universal tariff plan, this is watered down.
Of all the regions, reciprocal tariffs may hurt Europe the most since they have a 15% VAT, Value Added Tax. Mexico doesn’t have a VAT on US goods.
Now the talk is about global tariffs of 25% on steel and 10% on aluminum. The last time President Trump did this with steel and aluminum, Mexico was exempt from the tariffs.
Will that be the case now, we will see.
The reality is that Mexico is the second largest importer of steel to the US and the fourth largest in aluminum. This sounds bad, but Canada is in far worse shape being number one at multiples of Mexico.
Mexico has something to lose, no doubt, but Canada has more to lose and that seems to be where the attention is focused
In the end, a large part of the peso’s surprising resiliency probably comes down to good Mexican economic policy. Good policy leads to investor confidence in the peso.
Highlights of Mexico’s policy includes
The Bank of Mexico lowered interest rates by .5% to 9.5% and the peso held stable. Typically, lower interest rates lead to a lower currency versus the US dollar.
Second, this could happen because Mexico’s annual inflation decelerated for the third month in January 2025 to a low of 3.59%. The upper target band is 4%. Not too many countries can say they hit their inflation target. Well done Mexico!
Finally, the latest government refinancing extended debt maturities an average of 2.14 years.
Investors are willing to give money to Mexico for a longer time period.
Tariffs or not.
Given the yield pick up on CETES versus USD, short-term Mexican bonds still makes sense.
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