Mexican peso rises as US-Mexico tariff pause eases tensions

Mexican peso rises as US-Mexico tariff pause eases tensions

• The Mexican peso recovered after depreciating to a near three-year low as the US and Mexico pledged to cooperate.
• The dollar index pared gains after the announcement, supporting the peso's strength amid market optimism.
• ISM data showed improved US business activity, while the Fed's Collins warned that tariffs could push prices further higher.

The Mexican peso (MXN) recovered after depreciating to a near three-year low of 21.28 as US President Donald Trump and Mexican President Claudia Sheinbaum agreed to suspend tariffs for a month to cooperate on security and trade. USD/MXN traded at 20.53, down 0.99%.

Recently, Mexican President Sheinbaum said that she had several conversations with US President Donald Trump, which resulted in a one-month suspension of tariffs. The market sentiment turned positive after the news was released on Sheinbaum's X account, followed by Trump's statement on his Truth account.

Although the Mexican peso took a breather after the news, it will still float on Trump's words.

After the news, the US dollar index (DXY), which measures the performance of the US dollar against six currencies, pared its earlier gains of more than 1.27% and is currently up 0.23% at 108.75. The decline in DXY boosted the Mexican peso, which has reached a two-day high of 20.41.

On the data front, the Institute for Supply Management (ISM) revealed that US business activity improved in January, while Boston Fed President Susan Collins commented that tariffs "will push up prices at all levels of production," adding that the Fed needs to do more to reduce inflation.

Daily Market Update: Sheinbaum and Trump reach a deal, Mexican peso saved

• Mexican President Sheinbaum said Mexico will immediately deploy 10,000 National Guard troops to the border to avoid drug smuggling into the United States. She asked US President Trump to work to avoid selling high-powered weapons to Mexico.
• Sheinbaum added that tariffs have been suspended for one month.
• Trump agreed to immediately suspend tariffs for one month to the Mexican president. He added that the United States will negotiate with Mexico, led by Rubio, Bessant, Howard Lutnick and high-profile Mexican officials.
• The US ISM Manufacturing PMI rose to 50.9 in January, beating expectations of 49.8 and improving from 49.3 in December. The ISM Manufacturing Prices Paid sub-index rose to 54.9 from 52.5, indicating rising input costs.
• The Mexican peso could depreciate by 11.8% if the U.S. implements 25% tariffs, JPMorgan Chase revealed via Reuters. Bank of America said the "base case" is for tariffs to be postponed.
• Money market futures now price in 46 basis points of Fed rate cuts in 2025, with traders expecting the first cut to come in June.

Technical Outlook: Mexican Peso Appreciates but Conflicts with 50-Day SMA Support

The uptrend in USD/MXN remains intact, even as the peso erased more than 2% of losses on Trump's tariff rhetoric. Since hitting a daily high of 21.29, the forex pair has fallen to 20.50, failing to break above the 50-day simple moving average (SMA) of 20.43.

A break above the latter would expose the 100-day SMA of 20.14 before challenging the psychological level of 20.00. Conversely, if USD/MXN surpasses the previous year-to-date (YTD) peak of 20.90, a move towards 21.00 is expected.

Mexican Peso FAQs

What are the key factors driving the Mexican Peso?

The Mexican Peso (MXN) is the most traded currency among its Latin American peers. Its value is roughly determined by the performance of the Mexican economy, the policies of the country's central bank, the amount of foreign investment in the country, and even the level of remittances from Mexicans living abroad, especially in the United States. Geopolitical trends can also influence the Mexican currency: For example, the near-shoring process - or the decision by some companies to move manufacturing capabilities and supply chains closer to their home country - is also seen as a catalyst for the Mexican currency, as the country is considered an important manufacturing hub in the American continent. Mexico is a major exporter of commodities, and oil prices are another catalyst for the MXN. ＂

How do Banxico's decisions affect the Mexican Peso?

The main goal of the Mexican Central Bank, also known as Banxico, is to keep inflation low and stable (at or near its 3% target, the midpoint of its 2% to 4% tolerance band). To do this, the bank sets an appropriate interest rate level. When inflation is too high, the Spanish central bank will try to curb it by raising interest rates, which increases the cost of borrowing for households and businesses, thereby cooling demand and the overall economy. Higher interest rates are generally good for the Mexican Peso (MXN) because they lead to higher yields, making the country more attractive to investors. Conversely, lower interest rates tend to weaken the MXN.

How does economic data affect the value of the Mexican Peso?

The release of macroeconomic data is key in assessing economic conditions and can have an impact on the valuation of the Mexican Peso (MXN). A strong Mexican economy based on high economic growth, low unemployment, and high confidence is good for the Mexican peso. Not only does it attract more foreign investment, but it may encourage the Bank of Mexico (Banxico) to raise interest rates, especially if such forces coincide with high inflation. However, if economic data is weak, the Mexican Peso may depreciate.

How does broader risk sentiment affect the Mexican Peso?

As an emerging market currency, the Mexican Peso (MXN) tends to strengthen during periods of risk appetite, or when investors perceive overall market risk as low and are therefore eager to participate in riskier investments. Conversely, the MXN tends to weaken during times of market turmoil or economic uncertainty, as investors tend to sell riskier assets and flee to more stable safe havens.