Mexico’s currency, the peso, is something of a barometer for its relationship with the USA. When the relationship is sunny, the peso’s exchange rate versus the US dollar is strong: when storms are on the horizon, the peso falls.
Currently, Mexico’s relationship with the USA is decidedly stormy. The new US President, Donald Trump, has announced his intention to renegotiate the NAFTA trade agreement with Mexico and Canada, on which Mexico’s close trading relationship with the USA depends. He has also issued an executive order authorising the building of a wall to stop illegal immigration from Mexico to the USA. A proposal to pay for this by imposing a 20% tax on imports from Mexico caused the Mexican president to cancel a planned meeting with President Trump, though a subsequent phone call apparently smoothed down ruffled feathers to some extent.
But relief was short-lived. Mexico has now announced that if the USA attempts to impose high tariffs on imports from Mexico in the forthcoming NAFTA renegotiation, it will walk out of NAFTA. This would force the USA to adopt World Trade Organisation tariffs in its trade relationship with Mexico. According to Bloomberg, this would mean average tariffs of about 3% – hardly disastrous, compared to the proposed 20%.