The United States and Mexico have a unique relationship. The two neighbors are some of the closest trading partners in the world, with an annual trade volume of more than $700 billion. Mexico is known s the America’s factory because most products used in the US come from the country. This process accelerated after the NAFTA agreement, which came into effect more than 20 years ago.
Two weeks ago, as Mexico was about to start the parliamentary debate on the new USMCA agreement, Donald Trump announced that the country will impose additional tariffs on all goods from Mexico. The 5% tariff was to start today and rise to 25% in October this year. The reason for these new tariffs was that most Central American migrants were passing through Mexico to the US. In recent months, the number of these migrants has continued to increase.
In response to the announcement, Mexico took a diplomatic approach. The country sent senior ministers to the US to talk with the senior Trump officials. At this time, Trump was in Europe, where he visited UK, Ireland, and France.
On his return, the president announced that he will abandon the tariffs he had announced. This is after the Mexican side pledged to do more to deport and arrest more migrants from Central America. Mexico also allowed the US to hold the migrants waiting their court cases in the Mexican side. Previously, the approach is usually to release them to the public as they wait for their court cases. While this was a victory for Trump, Mexico refused to accept the US request for a third-country, where migrants would be requested to file for asylum in Mexico. Also, it was revealed that the deal signed was agreed on a while back.
In response to the announced deal, the Mexican Peso rose sharply against the USD. The USD/MXN pair declined to a low of 19.21, which was the lowest level since May 31st. On the chart below, the pair is below the 25-day and 50-day moving averages. The RSI has dropped to the oversold level of below 30 while the average directional index has continued to rise. While the pair could continue to decline, there is a likelihood that traders will start to focus on the weakening Mexican economy.