Mexico peso tanks on double whammy from ratings hit, no deal trade talks

Bundles of Mexican Peso banknotes pictured at a currency exchange in Ciudad Juarez, Mexico, on Jan 15, 2018.
Bundles of Mexican Peso banknotes pictured at a currency exchange in Ciudad Juarez, Mexico, on Jan 15, 2018. PHOTO: REUTERS

MEXICO CITY (BLOOMBERG) - The Mexican peso fell as much as 1.4 per cent as the currency reeled from a one-two punch, the first from ratings agencies and the second from inconclusive trade talks with the US.

Moody's Investors Service came first, cutting the country's outlook to negative from stable, followed by Fitch, which lowered the sovereign rating to BBB from BBB+. Minutes later, the first reports of a failure in the trade talks appeared.

In their decision to downgrade, Fitch cited the increased risk to Mexico's public finances from state oil company Pemex's deteriorating credit profile, along with ongoing weakness in the country's economy. At the same time, the failure of trade talks means that Mexican goods could be hit with 5 per cent tariffs starting on June 10 - tariffs that would increase monthly up to a maximum of 25 per cent.

Investors "need to price the first 5 per cent tariff set to start June 10 and gradually the risks for that to increase in July -- and beyond," said Alejandro Cuadrado, a senior strategist at BBVA in New York. "We still need details on the negotiations and any measures that the US specifically pursues since the measure is very broad."

The peso was 0.8 per cent lower at 19.737 per dollar as of 7:15pm in New York, paring earlier losses after US President Donald Trump said talks would resume on Thursday.

"Progress is being made, but not nearly enough!," Trump said in a Twitter post.

In a press conference after the meeting, Mexican Foreign Minister Marcelo Ebrard said that he was optimistic about Thursday's talks and that negotiators wanted to prevent tariffs for both economies.

Trump's comments offer "some hope and relief," said Cuadrado, adding that specifics of any potential agreement are unclear. "He still said the higher the tariffs, the more companies will return to the US, so the threat remains, with some opening to reverse it."

Trade fears have weighed on Mexican assets since Trump tweeted about his intentions to apply tariffs last Thursday. Many investors worry that the stress may continue as tariffs imperil a trade deal known as the USMCA between the US, Mexico and Canada that still needs to be ratified.