The Mexican peso extended its decline on Tuesday, briefly hitting a 15-month low, as hopes dimmed over the prospects for a new North American Free Trade Agreement following a sharp escalation in the tit-for-tat trade war between the US and Mexico.

The currency is 1.3 per cent lower in midday trade in New York. It had been down by as much as 1.9 per cent at 20.45 per dollar earlier in the day — its weakest level since February 2017.

The decline takes the peso’s drop this year to 3.8 per cent. It had been this year’s top performing emerging markets currency as recently as April with a 7.8 per cent gain.

The sell-off comes after Mexico hit back at the Trump administration’s steel and aluminium import tariffs on Tuesday with its own retaliatory measures on a wide range of US agricultural goods, including pork, cheese and apples.

The ramp-up in trade tension has further fanned fears that the US, Canada and Mexico are unlikely to reach a new Nafta deal before Mexico’s election this summer.

Just a day earlier, senior Republican and Senate majority whip John Cornyn downplayed the odds that a deal could be reached this year, telling reporters on Monday that there was no time in the US political calendar for Nafta discussions.

“It looks like they are kicking it over to 2019,” he said, according to Bloomberg.

Mexicans head to the polls on July 1 to vote for a new president. Surveys show Andrés Manuel López Obrador (Amlo), the hard-left populist candidate, is on course for a landslide win.

“As we’ve seen in Italy, market complacency over an expected populist government can quickly be unwound and USD/MXN can easily push to 20.50 near term,” said analysts at ING.

The view was echoed by analysts at Nomura, who said they expect the pressure on the peso to continue “in the coming weeks”.

The lack of positive catalysts on the Nafta front and the prospects of an Amlo presidency are “likely to either compound any sell-off pressure or cap any rally potential in the MXN coming from shifts in external risk sentiment,” they said.

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