ADVERTISEMENT

Peso Rebounds on U.S.-Mexico Tariff Truce

Ambiguities remain as to the specifics of the deal reached between the U.S. and its southern neighbor.

Peso Rebounds on U.S.-Mexico Tariff Truce
A patron pays for purchases with a 5000 Chilean peso note at a fruit cart in Santiago, Chile. (Photographer: Morten Andersen/Bloomberg)

(Bloomberg) -- Mexico’s peso rebounded following a deal to avert new U.S. tariffs on the Latin American country, while a retreat from haven assets weighed on the Japanese yen and the Swiss franc.

The Mexican peso rose as much as 2.5% to 19.1381 per dollar after U.S. President Donald Trump said late Friday that plans for a 5% tariff on Mexican goods had been “indefinitely suspended.” The yen weakened as much as 0.5% to 108.72 per dollar and U.S. stocks advanced, with the S&P 500 Index climbing 0.9% as of 11:38 a.m. in New York.

Threats by the U.S. leader to introduce levies on Mexico sent the peso to a year-to-date low last week. Tensions between the U.S. and Mexico had also added to concerns about global economic growth that have seen traders amp up their bets on potential interest-rate cuts by the Federal Reserve and provided fuel for the flight to safety that last week drove 10-year Treasury yields down to a level unseen since 2017.

The U.S.-Mexico accord “is definitely a relief for the markets,” said Nick Bennenbroek, head of currency strategy at Wells Fargo Securities, who expects the peso could reach 19 per dollar in the days ahead. “I suspect equity markets are going to react quite positively to the news, and emerging currencies overall are going to do quite well against that backdrop.”

Peso Rebounds on U.S.-Mexico Tariff Truce

Any remarks by Trump, be it on tariffs or any other threats, would continue to provide a good buying opportunity for Mexican assets, and a dovish Federal Reserve will give some tailwind, said Akira Takei, a global fixed-income fund manager at Asset Management One Co., with over $500 billion in assets under management. He has been overweight in the peso and bonds and does not plan to sell to take profits on Monday’s rally because he expects them to rise further.

“Mexico is not a real threat to the U.S., unlike China, and President Trump is using all those tariff talks as one of the strategies to get something he wants,” Takei said. “Speculation the Federal Reserve may refrain from raising key interest rate or even may cut is likely to cause bull steepening of Mexico’s sovereign curve. I am very positive on both Mexico’s interest rates and currency.”

Ambiguities remain as to the specifics of the deal reached between the U.S. and its southern neighbor. Trump vowed that Mexico would soon make “large” agricultural purchases from the U.S. as part of a deal on border security and illegal immigration. However, three Mexican officials said Saturday they were not aware of any side accord in the works, and that agricultural trade hadn’t been discussed.

The peso is unlikely to recover all the way to where it was “due to lingering uncertainty,” Exante Data Chief Executive Officer Jens Nordvig said. The dollar-yen pair is also “likely to retrace higher, as U.S. rates will have a tendency to move higher, and equity sentiment should be supported in the short-term too.”

For more on the outlook for the Mexican peso and rates, click here.

Peso Rebounds on U.S.-Mexico Tariff Truce

--With assistance from George Lei, Justin Villamil, Michael G. Wilson, Yumi Teso, Tomoko Yamazaki and Netty Ismail.

To contact the reporter on this story: Katherine Greifeld in New York at kgreifeld@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Julia Leite

©2019 Bloomberg L.P.