The Trump administration’s move this week to slap tariffs on imports of Canadian lumber is a rude reminder to Mexican bulls that the risks associated with US trade protectionism can flare up when least expected.
The Mexican peso lurched lower for a second straight day day on Wednesday, weakening past the key 19-per-dollar level for the first time in five weeks after the US hit out at Canada’s lumber and dairy industries.
The decision to impose new tariffs on Canadian softwood lumber exports and comments that these actions could be broaden to include Canada’s dairy trade come as the US, Canada and Mexico prepare to begin talks to renegotiate the North American Free Trade Agreement.
Despite Mr Trump’s campaign promise to protect American workers and bring back jobs from Mexico by ripping up Nafta, Mexican assets have been rallying hard since the start of the year as investors doubted the White House’s ability to fully deliver on its protectionist trade policies, especially following the administration’s humiliating setback on healthcare reform earlier this month.
From a record low of 22 per dollar in January, the peso strengthened more than 16 per cent to hit a post-election high of 18.4563 last week, putting the currency within striking distance of the 18.32 level it closed at on November 8th, before news of Mr Trump’s presidential victory triggered a collapse.
The peso has come back under selling pressure this week, however, amid concerns that the US could take aim at Mexican trade next. The currency fell as much as 1.7 per cent on Wednesday to 19.1777, its weakest level in more than a month.
As analysts at BofAML warned last month, the balance of risks for Mexico remains tilted to the downside “because US policies negative for Mexico still could be enacted.”
“For instance a tax reform that lowers the US corporate tax rate reducing incentives to invest in Mexico, or a renegotiation of the North America Free Trade Agreement (NAFTA),” they said. “And political risks in Mexico remain, with low approval for the president and his party, which could lead the extreme left to win the presidency in 2018, which in turn could be detrimental to fiscal conditions.”