Mexican Peso Gains on Optimism About Washington Tariff Talks

(Bloomberg) -- Up. Down. Sideways. Mexico’s peso gyrated amid key talks in Washington aimed at staving off U.S. tariffs. By midafternoon New York time, the peso was solidly in the green on a bet that any agreement -- even if it’s just to keep on talking -- will bolster Latin America’s most-traded currency.

Negotiations on Wednesday between a Mexican team led by Foreign Minister Marcelo Ebrard and his U.S. counterpart, Michael Pompeo, come just days before U.S. President Donald Trump’s June 10 deadline for the first 5% of levies. Trump’s decision has already drawn the ire of his own Republican party. They also threaten to complicate implementation of the U.S.-Mexico-Canada free trade agreement that Trump pushed as a replacement for the Clinton-era pact.

“The U.S. administration wants to get the USMCA deal done and if they move forward with these tariffs, that will essentially blow it up,” said Brendan McKenna, a currency strategist at Wells Fargo in New York. “Trump is running out of things he can point to as ’wins’ right now, so if he can put the USMCA on the scoreboard, I think he finds a way to do that.”

If the two sides do manage to dodge any tariffs, the peso could rally to almost 19.05 per dollar, from about 19.50 now, McKenna said. Danny Fang, a strategist at BBVA in New York, sees the peso strengthening to between 19.3 and 19.0, about where it was before Trump first announced his decision on May 30.

“My guess is that there is a lot of pressure to resolve this eventually,” Fang said.

At Standard Chartered, strategist Ilya Gofshteyn says that while today’s meeting probably won’t produce many tangible measures, it will probably result in an agreement to delay tariffs and keep talking. If that happens, the peso will likely strengthen to between 19.25 and 19.30, he said.

“The administration is getting intense pressure from GOP legislators to hold back,” Gofshteyn said. “Meanwhile, the AMLO administration has been quite conciliatory.”

There’s also a worst case to consider: An escalating series of tariffs that reach a maximum of 25%. In that scenario, the peso could lose more than a 10th of its value by the end of the year, sliding to 22 per dollar, according to Jesus Lopez, a strategist at Banco Base in Monterrey. Lopez calls that possibility unlikely.

“It’s likely that even if the conclusion is of a positive tone and cooperative, Trump will decide to go ahead with the first round of tariffs, which will generate some pressure on the peso,” Lopez said.

McKenna says that if the first round of tariffs is imposed, the peso will likely go to 20 and stay there for some time to come. Fang says that if the full 25% is in effect, peso could hit 21.5 or worse.

To contact the reporter on this story: Justin Villamil in Mexico City at jvillamil18@bloomberg.net

To contact the editors responsible for this story: Julia Leite at jleite3@bloomberg.net, Alec D.B. McCabe, Philip Sanders

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