I have taken a long position on the USD/MXN as the Bank of Mexico dropped the Interest rate to 9% down from 9.5% this morning.
Economic Analysis: Mexico
I was waiting to see what the Bank of Mexico would do with the interest rate, as inflation has been coming down as you can see from the picture below. It is now 3.77% up slightly from the previous month.
Reading the Bank of Mexico’s notes I can see that the economy is expected to weaken in Q1 of 2025. Inflation is now at 3.77% with core inflation at 3.56%. They expect inflation to reach the 3% target by Q3 2025.
The bank reduced interest rates due to global economic challenges, and tariffs from America are weighing in on this decision. They also mention geopolitical risks, such as the fluctuating nature of U.S.-Mexico relations and potential political instability within Mexico, which could lead to weaker economic activity within the country. Any sudden changes in diplomatic or trade negotiations could lead to uncertainty and volatility in the USD/MXN exchange rate. Additionally, security concerns and broader global trade tensions also play a role in this analysis. These factors all contribute to the uncertainty surrounding the Mexican economy
Let’s look at other key metrics
Mexico
- GDP Growth: -0.6%
- Inflation: 3.77%
- Interest Rate: 9%
- Manufacturing:47.6
- Consumer Confidence: 46.3
- Retail Sales: 0.6%
- Unemployment Rate: 2.5%
- Personal Income Tax: 35%
United States
- GDP Growth: 2.4%
- Inflation: 2.8%
- Interest Rate: 4.5%
- Manufacturing:49.8
- Consumer Confidence: 57.9
- Retail Sales: 0.2%
- Unemployment Rate: 4.1%
- Personal Income Tax: 37%
Potential Impact of Tariffs
As you can see GDP growth is down for Mexico, Inflation is higher too, GDP growth is stronger and inflation is less for the USA. While the interest rate for Mexico is higher, they face more uncertainty for their economy than the United States of America.
This could play out in a few ways. I mentioned tariffs higher up in the post and my thinking is as follows: if the USA imposes tariffs on goods produced in Mexico, those goods will be more expensive for people to buy in the USA.
The result from this is fewer products would be bought, reducing the amount that Mexico exports. The companies in Mexico producing the goods would normally have received USD dollars which they would convert into Pesos to pay their supply chain.
With less demand from the USA fewer dollars would flow into Mexico. This will mean less demand for Pesos and when we look at supply and demand. We know that when demand drops the currency will depreciate compared to the US dollar.
With the Peso dropping investors will sell the currency to invest their money elsewhere like the USA for example where you can get a T-bill for 52 weeks maturity paying 4.08%.
Conclusion and Outlook for USD/MXN
In my last blog post I shorted the EUR/USD and it’s my reason for that was that the interest rate in Europe was decreasing but also the economy was stagnant with a few other confirmations like inflation etc. This is slightly different as there are factors to consider, particularly geopolitical risks, supply chain risks by being too reliant on the USA especially for parts for cars, electronics and agriculture as they currently rely on the USA for almost 80% of their exports. .
If tariffs are imposed on Mexico goods from the USA, Mexican companies will need to look further afield to find buyers for their products. The result of all this could be a much weaker currency.
I am continually monitoring USD/MXN in the financial news coming out weekly to see how long I will stay in the trade.
Please not, I am not providing any financial advice in these posts, I am melry documenting my journey.
If you have any questions or thoughts please leave a comment below.
