The Mexican Peso (MXN) is under significant pressure, extending its losses against the US Dollar (USD) amid an intensifying US-China trade war. Following the latest tariff hikes from both sides, the Peso has fallen to a 9-week low, with the USD/MXN exchange rate briefly breaching the 21.00 mark before retreating to 20.96.
As trade tensions escalate, volatility has been surging, driving risk sentiment lower and further pressuring the Peso. This topic is covered extensively by TelaraX‘s team in the following article.
US-China Trade War: The Catalyst for MXN’s Decline
In a dramatic escalation of the US-China trade dispute, the United States imposed additional tariffs on Chinese goods, a move that China swiftly retaliated against by levying 50% tariffs on American exports.
As a result, the total duties on US products destined for China have now surged to 84%. This stark escalation has heightened uncertainty in the markets, especially as it compounds existing concerns about global growth and trade stability.
The imposition of tariffs on both sides was a critical driver of the USD/MXN movement. The Mexican Peso, as an emerging market currency, is highly sensitive to shifts in global risk appetite. When trade tensions flare, investor confidence typically wanes, sending capital flows into safer assets like the US Dollar.
Consequently, the Peso’s depreciation reflects broader market concerns about the global economic outlook and Mexico’s vulnerability to the trade conflict.
Volatility in US Treasuries: The Fed’s Potential Response
The US Treasury market also felt the reverberations of the escalating trade conflict. In response to the heightened tensions, the US 10-year Treasury yield surged to a daily high of 4.513%. The spike in yields has reignited fears of a dislocation in the US financial markets, prompting speculation about the possibility of a Fed intervention.
Traders are now questioning whether the Federal Reserve will step in to mitigate the impact of rising yields. The notion of a “Fed put“–the idea that the Fed will act to cushion the bond market in times of distress–has gained traction.
If the yield on the 10-year note continues to climb above the critical 4.50% level, many market participants anticipate that the Fed could intervene to restore market stability.
Mexican Inflation Data: Banxico’s Rate-Cut Expectations
Amid these global developments, Mexico’s inflation data continues to paint a relatively stable picture. In March, Mexico’s Consumer Price Index (CPI) rose by 3.80% year-on-year, a figure that met market expectations and was only slightly higher than the 3.77% increase recorded in February. The core CPI, which excludes volatile items such as food and energy, also rose by 3.64%, in line with forecasts.
This inflationary trend supports the Banco de Mexico (Banxico), as the central bank remains within its target range of 3% 1%. As a result, Banxico is expected to maintain a cautious approach, although the consistent inflation alignment may open the door for potential rate cuts.
Market participants are particularly eyeing Banxico’s upcoming policy decision in May, where a 50 basis point (bps) rate cut is a real possibility, especially as global pressures weigh on the Peso.
Economic Growth and Market Expectations
Despite these inflationary pressures, Mexico’s Gross Domestic Product (GDP) growth forecast for 2025 has been revised downward. The Citi Mexico Expectations Survey now anticipates that GDP will grow by just 0.3%, a significant slowdown from the previous estimate of 0.6%.
This downward revision highlights the risks to Mexico’s economic performance from the ongoing trade disruptions, as the country is closely tied to both the US and China in terms of trade and investment flows.
USD/MXN Technical Outlook: Navigating the Volatility
From a technical perspective, the USD/MXN currency pair is expected to remain within its current volatility range, with the potential for further upside if the geopolitical situation continues to escalate.
The immediate technical resistance lies at the 9-week high of 21.07, with the year-to-date (YTD) high at 21.28 serving as the next major barrier. If the US Dollar continues to strengthen, traders may target a move toward 21.50, with the psychological level of 22.00 potentially coming into focus in the medium term.
On the downside, if USD/MXN breaks below the 20.50 mark, key support levels will come into play near the confluence of the 50-day and 100-day Simple Moving Averages (SMAs), which are currently positioned at 20.34/36. If this support fails to hold, a deeper pullback toward the critical 20.00 figure could materialize.
Conclusion: A Wait-and-See Approach
In conclusion, the Mexican Peso remains under significant pressure, largely due to the US-China trade war, which has fueled market uncertainty and diminished risk appetite. While Mexico’s domestic inflation data remains stable and aligned with Banxico‘s target, the external risks linked to global trade dynamics are likely to continue weighing on the Peso.
COMTEX_465096303/2922/2025-05-01T01:54:56
