Mexican Peso rally faces reversal as US tariff freeze nears expiry

The Mexican peso, one of the top-performing emerging market currencies this year, is expected to lose ground in the coming months as a temporary pause on US tariffs expires next week, according to a Reuters poll of foreign exchange strategists.

After strengthening to its highest level in nearly a year during the second quarter, the peso is projected to reverse some of those gains.

A median forecast from 22 analysts surveyed between June 27 and July 2 suggests the currency will weaken by 5.5% over the next 12 months, falling to 19.80 per US dollar from its current level of 18.72.

Despite the projected decline, the one-year outlook is the strongest since October, when the median estimate stood at 19.20.

The peso has appreciated 13.2% so far this year, supported by favourable trade developments and a broadly weaker dollar.

Temporary trade calm nears its end

The current peso surge followed a period of relative calm after US President Donald Trump implemented new trade measures that proved to be less detrimental to Mexican exporters than previously anticipated.

The bullish feeling was bolstered by a 90-day deferral of heavy US tariffs on many countries, including major trading partners China, Japan, and the European Union.

The grace period, introduced in April, expires on July 9, reigniting concerns about global trade tensions.

However, Mexico is mainly immune to direct tariff retaliation because of its favourable status under the United States-Mexico-Canada Agreement (USMCA).

“Mexico is not subject to reciprocal tariffs, taking pressure off the peso into the global July 9 deadline,” Erick Martinez, Latin America FX and rates strategist at Barclays was quoted in the report.

USMCA, interest rates offer cushion

The continued shielding of the Mexican economy under the USMCA could help support the peso, analysts say.

Not to mention, the monetary policy dynamics might also provide some support.

The Bank of Mexico's cautious approach to rate cuts, along with predictions of easing in the United States, suggests a significant interest rate spread in favour of the peso.

This yield advantage has helped to attract investor inflows, boosting the currency amid rising external threats.

However, the ongoing uncertainty surrounding the likely renegotiation of the USMCA may cause traders to be sceptical.

Any shift in trade policy debates has the potential to alter investor confidence and cause currency market volatility.

Regional outlook: Brazil and Argentina face pressure

Mexico is not the only country that is going to struggle in the upcoming days.

The real is expected to depreciate 4% in Brazil over the next 12 months from 5.46 to 5.69 per dollar.

The real is still at the mercy of risk sentiment and domestic fiscal uncertainties, albeit supported by Brazil's historically high interest rates.

The peso in Argentina is estimated to drop 17% in 12 months to 1,465 a dollar.

The currency will remain under tight government control, and the prediction stays in line with official targets.

The real has appreciated 11.2% so far this year, and the Argentine peso has depreciated 15.7%.