Mexico peso set to slip after expiry of US tariff hike freeze

The rallying Mexican peso is forecast to depreciate by 5.5% over the next 12 months to 19.80 per dollar, according to a Reuters poll, as the temporary freeze on U.S. tariff hikes expires next week. Despite this anticipated slip, the peso's downside is expected to be limited due to Mexico's preferential trade treatment under the USMCA agreement and persistent high local interest rate spreads. However, the potential renegotiation of the USMCA agreement introduces future uncertainty for the currency.

Analysis

The Mexican peso, after a significant 13.2% year-to-date appreciation, is forecast for a moderate depreciation over the next year. A Reuters poll of 22 FX experts projects a 5.5% decline to 19.80 per dollar, a consensus that has firmed since October. The primary catalyst for this anticipated slide is the expiration of a 90-day U.S. tariff hike freeze next week, which threatens to reverse the recent rally that was supported by a weaker dollar and benign new trade rules. However, several factors are expected to limit the peso's downside. Strategists from Barclays and Ve por Mas note that Mexico's preferential trade status under the USMCA and its exemption from reciprocal tariffs provide a significant buffer against global trade frictions. Furthermore, supportive monetary policy, characterized by a cautious easing cycle from Mexico's central bank and potential rate cuts in the U.S., is expected to maintain a high local interest rate spread, sustaining the currency's appeal for carry trades. The primary risk to this outlook remains the potential for a renegotiation of the USMCA agreement, which would introduce significant uncertainty.

Key Decisions for Investors

• Given the consensus forecast for a 5.5% depreciation driven by the expiring U.S. tariff freeze, investors with long peso exposure should consider hedging or reducing their positions to mitigate near-term downside risk.
• The persistent high interest rate differential between Mexico and the U.S. continues to support the peso carry trade, but investors must weigh the yield against the forecast currency depreciation.
• Monitor any developments related to a potential renegotiation of the USMCA, as this represents the most significant tail risk that could undermine the peso's fundamental supports.