Improved Quarterly Performance of Mexican Peso documented since 2020
In recent news, the U.S. Senate has proposed a tax and spending cut bill, which, while primarily focused on the American economy, may have indirect effects on Mexico's economy and the peso exchange rate.
The bill, known as the "One Big Beautiful Bill," aims to permanently extend the Trump-era tax cuts and provide tax relief for households earning under $400,000 and small businesses. However, it also includes significant cuts to federal energy tax credits, which could potentially increase U.S. household energy costs by about 10%.
Mexico, being the United States' largest trading partner, is closely watching these developments. The U.S. economy's performance, influenced by the tax cuts, could impact Mexico's exports, trade volumes, and investment flows. If the tax cuts stimulate U.S. economic growth sustainably, this could enhance demand for Mexican exports, supporting the peso's stability or appreciation. Conversely, if the tax cuts significantly increase the U.S. deficit without spurring commensurate growth, potential inflationary pressures or higher interest rates in the U.S. could dampen demand and negatively affect Mexico's export sector.
Another concern is the potential increase in U.S. deficits, which may lead to monetary tightening by the Federal Reserve to curb inflation. Tighter U.S. monetary policy often strengthens the U.S. dollar and weakens emerging market currencies like the Mexican peso. A stronger dollar versus the peso can increase the cost of dollar-denominated debt for Mexican companies and potentially destabilize financial markets.
The bill's changes in U.S. energy policy could also affect Mexico’s energy sector competitiveness and external balance. As an energy exporter and importer of energy products and technology from the U.S., shifts in U.S. energy policy and prices can impact Mexico’s energy sector.
Lastly, large U.S. tax cuts favoring corporations and high-income earners may lead to capital flows into U.S. financial markets. This might result in volatility for emerging markets like Mexico, affecting peso exchange rate stability.
In conclusion, while the U.S. Senate’s proposed tax and spending cuts primarily target U.S. fiscal policy and domestic economic relief, the large-scale nature of these changes, increased deficits, and altered energy subsidies are likely to have indirect impacts on Mexico's economy and peso exchange rate. The main channels would be through trade demand fluctuations, risk of U.S. interest rate hikes, dollar strength potentially weakening the peso, and shifts in energy markets impacting Mexico’s economy.
The bill's large-scale tax cuts, if implemented, could potentially influence investment flows towards U.S. financial markets, which might result in volatility for emerging markets like Mexico's finance sector. Given that Mexico is closely watching these developments, any impact on the U.S. economy's growth could indirectly affect their exports, trade volumes, and investment flows, and subsequently influence the peso exchange rate.
