Trump and His Tariffs Again! Mexico This Time!
It was another day at the office for the global markets and another tariff decision by President Donald Trump. As the global markets have been heated up by the tensions of trade wars all over the world, new economic and political fights have been occurring instead of the calming down of current ones.
President Trump had been warning Mexico to stop their immigrants crossing US borders illegally. Trump had also promised to build a wall along the whole border between the USA and Mexico and he said that he would make Mexico pay for the cost of the wall. It is unclear on whether he has received payment for the wall but one thing we can be sure of is that he seems to do whatever it will take to stop immigrants passing through American borders illegally.
European shares were bleeding on Friday amid fears over global trade after US President Donald Trump announced on his twitter account that the US will impose a 5% tariff on all Mexican goods starting from June 10th and stated that the tariffs could rise up to 25% unless Mexico start to take action to stop the flow of illegal immigrants in to the US.
Mexico’s leader Obrador made a statement right after Trump’s decision of tariffs saying that social problems cannot be solved with tariffs.
Just the announcement of a 5% tariff was more than enough for the Mexican Peso to fall against the US dollar by more than 3.1% in just a few hours. The USDMXN soared from ~19.08 to 19.74 on Friday.
USDMXN (US dollar vs. Mexican peso)
Mexico is and will be continue to go through hard times financially, inflation, interest and PMI rates are a clear indicator of this.
Mexico’s inflation rate has been falling since September 2018 through to February 2019. The inflation rate had reached its lowest in February in the last few years but it soared in April again by 10% and reached 4.41%.
Mexico Inflation Rate
Mexico’s interest rate is relatively high compared to most developed and some developing countries. The Central Bank of Mexico held its overnight interbank interest rate at a decade high of 8.25% during its May meeting, saying inflation expectations increased for both the short and medium terms, while those for the long term remained unchanged, all of them remaining clearly above the 3% permanent target.
It seems like the central bank may have to increase the interest rates again as the inflation rate seems to keep on rising with the current economic and political situation. The imposed tariffs by the USA will have an additional negative effect on the Mexican economy. By depreciating the Mexican peso against US dollar, it is highly likely that inflation rates will rise, which will mean likely increase in interest rates.
Mexico Interest Rate
The new imposed tariffs on Mexican goods (will start in 10th of June) will negatively affect the Manufacturing PMI of Mexico. The manufacturing PMI of Mexico has been fluctuating near 50, which is the neutral point of the graph below for the last few years but the path of the fluctuation and the trend of the index indicate to us that it is likely to go below 50 (contraction) in the coming months (if the imposed tariff is not removed).
Mexico Manufacturing PMI
President Trump’s approach to the different kind of problems makes global market to behave pessimistically about the industry sector. As Trump is getting used to imposing tariffs in response to all kind of political, economic etc. problems, the global markets have started to lose its purchasing power and motivation as it continuosly hurts the manufacturers and traders.
The trade wars definitely hurt countries like Mexico so they need to find a way to sort the border problem as soon as possible before the economy is out of control. Economically, USA has been fighting on various fronts but if you look at the economic data, the USA seems to have the power to resist until its rivals give up. But the problem is, the importers of Mexican goods and services (US firms or individuals) may lose patience because of the increasing import costs so they may put pressure on their governments to sort the problems out by finding alternative paths.
