US President Donald Trump announced he will discuss a trade deal with Mexican President Claudia Sheinbaum, aiming to finalize it within 90 days. During this period, Mexico will continue to face tariffs: a 25% tariff on fentanyl and cars, and a 50% tariff on steel, aluminum, and copper. The USD/MXN exchange rate showed a slight recovery, trading at 18.82, which is a 0.3% decrease for the day. This change followed the announcement of the trade talks.

Understanding Tariffs

Tariffs are fees placed on imported goods to support local industries. They are different from taxes as they are collected at ports of entry. People debate their effectiveness; some think they protect local businesses, while others worry about their potential negative effects on the economy. Trump intends to use these tariffs to strengthen the US economy, especially focusing on imports from Mexico, China, and Canada, which made up 42% of US imports in 2024. In that year, Mexico was the top exporter with $466.6 billion. He wants to use money from tariffs to lower personal income taxes. Given the 90-day negotiation period, the recent drop in the USD/MXN to 18.82 seems like a short-term change rather than a lasting trend. The next few weeks may be marked by uncertainty, leading to significant fluctuations in the peso. This situation is reminiscent of the USMCA renegotiations in 2018 when the peso saw swings of over 10% based solely on political comments.

Impact on Markets and Strategies

This uncertainty suggests that capitalizing on long volatility strategies might be profitable. We see high implied volatility in options for the iShares MSCI Mexico ETF (EWW) and the USD/MXN currency pair. After the VIMEX, Mexico’s volatility index, spiked over 30% following the June 2024 election results, we expect volatility to remain high and sensitive to news from the talks. The specific risk of a 25% tariff on cars makes the auto industry particularly vulnerable. We are considering buying protective puts for companies heavily reliant on Mexican manufacturing. In 2024, Mexico exported over $130 billion in vehicles and parts to the U.S., so any disruption would quickly affect earnings and stock prices for companies on both sides of the border. In addition, the proposed 50% tariff on metals presents a clear opportunity for a pair trade strategy. We expect this to negatively impact Mexican steel producers like Ternium while benefiting U.S. firms. In 2024, Mexico was among the top five steel suppliers to the U.S., making this tariff a serious threat to their market position. Beyond these specific industries, the risk of the talks falling apart could affect overall market sentiment. We recall how the market declined during the 2018-2019 trade disputes, which had a negative impact on the S&P 500. Therefore, holding some out-of-the-money puts on major indices like the SPX could provide a smart hedge as the 90-day deadline draws near. Create your live VT Markets account and start trading now.

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