June 28, 2019 / 1:48 PM / 4 months ago

Mexican peso will dance in July to rhythm of USMCA and Trump

MEXICO CITY, June 28 (Reuters) - Mexico’s currency is expected to fluctuate between 18.5 and 20 pesos to the dollar in July as the market awaits U.S. ratification of a trade deal with Mexico and Canada and threats of tariffs from U.S. President Donald Trump linger, analysts say.

The Mexican peso, on track to strengthen slightly in the second quarter, will face challenges stemming from state oil company Pemex’s massive debt, Washington’s trade war with Beijing and potential fluctuations in U.S. interest rates, analysts say.

“We are going to see a July of volatility and the peso’s value will be subject mainly to international issues,” said Alejandro Padilla, director of fixed income and exchange rate strategy at Banorte.

The peso, which traded Friday morning at 19.17 to the dollar, has strengthened 2.4% so far this year after weakening at the end of last year, hammered by President Andres Manuel Lopez Obrador’s decision to cancel a partly built $13 billion airport for the capital.

After Trump demanded in early June that Mexico impose tighter migration controls or face tariffs, analysts feared the peso could weaken again.

Mexico sidestepped the threat by proposing a tougher plan to curb the flow of U.S.-bound migrants through Mexico, and agreeing to resume talks in 45 days if it did not reduce the numbers of Central Americans and other migrants entering Mexico.

As the timetable for further negotiations approaches, investors are anxious.

“The big question is whether it will seem sufficient to Trump,” said Benito Berber, Natixis chief economist for Latin America.

He predicted that the exchange rate will fluctuate between 18.50 and 19.75 pesos per dollar. The peso would remain in the lower part of the band if the U.S. ratifies the United States-Mexico-Canada-Agreement, set to replace the North American Free Trade Agreement, without complications and Trump approves of Mexico’s migration efforts.

In the United States, Republicans have sought to pass USMCA before the August congressional recess to avoid having a vote coincide with budget debates and the 2020 presidential campaign. But Democrats, who hold the majority in the lower house, have indicated they are in no hurry.

If USMCA does not pass and Mexico is hit again by Trump’s tariff threats, the peso could depreciate to 20 per dollar, a level not seen since December, according to Banco Base estimates. (Reporting by Abraham González, additional reporting by Miguel Angel Gutiérrez, Writing by Daina Beth Solomon and Julia Love; Editing by Steve Orlofsky)

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