Mexican Peso's Streak of Strength Explained
The Mexican peso has defied expectations, showing remarkable resilience in the face of US tariff threats and the global pandemic. Despite initial concerns, the vast majority of Mexican exports to the United States have gone tariff-free due to an exemption for the US-Mexico-Canada trade deal (USMCA) [1].
This exemption, coupled with compliance with USMCA rules of origin, has limited the negative trade impact, allowing Mexican exporters to thrive [5]. The peso recovered quickly after a sharp drop in early 2020 and stabilised between 19-20 pesos per dollar by late 2020 [1][3].
Several factors have contributed to the peso’s relative strength. Limited tariff exposure has reduced direct economic harm from trade tensions [5]. Mexico's central bank (Banxico) maintained relatively high interest rates compared to the US, attracting domestic and foreign investment that supported the peso [3]. The attractive short-term returns on Mexican debt encouraged local funds to stay invested domestically, boosting demand for the peso [3].
The stable trade relationship under USMCA has also helped maintain robust trade flows, despite tariff uncertainties [5]. Furthermore, the peso rebounded strongly by late spring, reflecting improved market confidence, after it hit historic lows in early 2020 due to COVID-19 fears [1].
While the US dollar appreciated broadly against many currencies in late 2024, the peso's gains earlier in 2020 and resilience through 2021-2022 reflected these mitigating factors [2][3].
The strong performance of the Mexican peso is not solely due to carry trading, a practice where investors borrow money in low-yielding currencies and invest in Mexican assets with higher yields [4]. It's a testament to Mexico's resilience and adaptability in the face of challenging circumstances.
Elsewhere, Nvidia's sale of its older H20 chip model to China has been confirmed, despite restrictions on AI chip sales for national security reasons angering some US officials [6]. The moves have raised concerns about the US-China tech rivalry and its potential impact on global trade.
Meanwhile, European leaders are planning to meet US President Donald Trump this week ahead of his sit-down with Russian President Vladimir Putin. The meeting will take place in Alaska on Friday [7]. The leaders from countries including France, the UK, and Poland will be present, aiming to discuss more ways to put pressure on Russia [8].
In Taiwan, an unprecedented mass recall vote last month targeted pro-Chinese politicians across the country, but the vote was unsuccessful. The main opposition party, the Kuomintang (KMT), is accused of colluding with the Chinese Communist party and being too willing to have exchanges with Beijing [9]. The KMT denies being pro-China, but their frequent exchanges with the Communist Party of China and use of language that denounces Taiwan's president or denies its sovereignty have raised eyebrows [9].
Kathrin Hille, the FT's Greater China correspondent, will be observing whether Taiwan can pull itself together, find consensus, and avoid being internally divided. She will also be watching whether China tries to exploit Taiwan's difficult domestic political situation further and whether this infighting undermines Taiwan's relations with the US [10].
In Ukraine, President Vladimir Zelenskyy will not be present at the meeting between Trump and Putin. The leaders are expected to discuss territorial swaps between Russia and Ukraine, a proposal that European and Ukrainian leaders have pushed back on [11].
Germany has convened a virtual meeting on Wednesday to discuss more ways to put pressure on Russia [12]. The meeting comes as tensions between Russia and the West continue to escalate.
References: 1. The Mexican peso performed well in 2020 despite initial concerns about US tariffs 2. The Mexican peso's current state does not necessarily indicate a strong relationship between the US and Mexico 3. Why the Mexican peso is on a tear 4. The strong performance of the Mexican peso is due to carry trading 5. Vast majority of Mexican exports to the United States are going tariff-free 6. Nvidia to sell AI chips to China, with the US government taking a 15% cut of the sales 7. European leaders to meet Trump ahead of Putin sit-down 8. Leaders from countries including France, the UK, and Poland will be present 9. Taiwan's mass recall vote failed due to the KMT's well-oiled party machine 10. Kathrin Hille, the FT's Greater China correspondent, will be watching Taiwan 11. Trump has suggested territorial swaps between Russia and Ukraine 12. Germany convenes virtual meeting to put pressure on Russia
The strengths of the Mexican peso, including its resilience and recovery, can be attributed to factors such as low tariff exposure, high interest rates, and attractive short-term returns on Mexican debt [1][3]. Meanwhile, the tech sector is witnessing concerns about the US-China tech rivalry, as Nvidia's sale of its older H20 chip model to China has raised questions [6].
In the global economy, the US dollar's appreciation in late 2024 did not starkly contrast the peso's early 2020 gains and subsequent resilience through 2021-2022 [2]. Simultaneously, the US-China tech dispute could impact global trade, given the potential consequences of AI chip sales restrictions for national security reasons [6].
