Mexican Peso Weighed Down by Renewed USMCA Friction

Key Moments

Commerzbank Flags Disappointing September for MXN

Commerzbank’s research highlights that the Mexican peso (MXN) delivered a weaker-than-expected performance in September, giving up more than 4% against the US dollar since 22 September. The bank notes that, although there was some stabilization yesterday, the overall picture for the currency during the month remained negative.

According to the analysis, conventional macroeconomic drivers and guidance from Banco de México (Banxico) only partially explain the recent selling pressure in MXN. This leaves a portion of the move that appears to be tied to factors specific to Mexico, contributing to an additional risk premium embedded in the currency.

Global Drivers Explain Only Part of the Peso’s Decline

Commerzbank points to the broader market backdrop as an important element behind the pressure on emerging market currencies. The bank writes: “The combination of a strong US dollar and heightened risk aversion likely accounts for much of the weakness seen in many emerging market currencies. When movements in oil prices and US yields are also factored in, only a relatively small residual effect remains for most currencies.”

For the peso, however, those usual drivers do not fully account for the scale of the depreciation. Commerzbank notes: “In the case of the peso, however, this seems insufficient as an explanation; around a third of its weakness since last week is accounted for by the obvious influencing factors.”

USMCA Negotiation Risks Add Mexico-Specific Premium

The bank’s research suggests that renewed concerns around the United States-Mexico-Canada Agreement (USMCA) may be weighing additionally on the peso. It states: “It is also possible that the MXN’s weakness was due to resurgent risks relating to the USMCA negotiations. Last week, the new round of negotiations was postponed.”

This postponement is cited as a potential catalyst for investors to reassess Mexico-specific risks, which may be prompting a fresh risk premium in the currency beyond what is implied by global macro conditions alone.

Outlook: Potential Supportive Shift in Sentiment and USD

Despite the recent setback for MXN, Commerzbank maintains a constructive medium-term view on the broader environment for emerging markets and on the peso’s prospects against the US dollar. The research notes: “While we expect current market sentiment towards emerging markets to improve again, which should support the peso, we also anticipate renewed weakness in the US dollar.”

At the same time, the bank underscores that its longer-standing caution regarding Mexico-specific risks has been validated by recent market action: “Nevertheless, our long-held view that the market should not ignore the risks associated with the MXN has been vindicated.”

Breakdown of Drivers Behind Recent MXN Weakness

Commerzbank’s analysis effectively divides the recent MXN move into global and local components. While precise numerical contributions beyond the cited proportion are not detailed, the bank stresses that only part of the decline can be linked to conventional macro influences.

The bank concludes that while the macro backdrop may turn more favorable for MXN as emerging market sentiment and the US dollar shift, investors should remain attentive to Mexico-specific risks that can amplify volatility in the peso.