Peso Rallies as Traders Bet on Sheinbaum in USMCA Talks

The Mexican peso is one of the world's best-performing emerging market currencies this year, yet it faces a critical test this summer: a high-stakes review of the USMCA trade pact. With Donald Trump threatening new tariffs, many currencies would falter, but investors are betting the peso’s rally has room to run.

The peso has climbed more than 4% in 2024, buoyed by powerful global tailwinds. The currency's strength is fueled by carry trades, where investors borrow in low-interest currencies to invest in Mexico's high-yielding assets. A softer U.S. dollar and soaring commodity prices have provided additional momentum.

Now, traders are increasingly placing their confidence in President Claudia Sheinbaum's ability to navigate the upcoming trade negotiations with the United States and Canada.

The Bull Case: A Path to 15 per Dollar?

Optimism around the peso is backed by some aggressive forecasts. Jason Schenker, president of Prestige Economics and a top-ranked peso forecaster by Bloomberg, believes positive surprises in the trade talks could propel the currency significantly higher.

"Upside surprises in trade talks could push the peso to 16 to the dollar very easily, maybe even a 15 handle in the next 12 to 18 months," Schenker said. The currency currently trades around 17.3.

This confidence reflects a belief in the deepening economic ties between Mexico and the U.S. "It might take a while for everything to be fully hashed out," Schenker noted, but he expects cooperation and economic integration to accelerate over time.

President Sheinbaum has also highlighted the peso's performance as a sign of stability. "The peso wouldn't be where it is if there weren't certainty," she said at a press conference on January 2, referring to the outlook for the economy and its trade relationship with the U.S.

Key Risks: Volatility and Crowded Trades

Not everyone shares this bullish outlook. Analysts at BBVA Mexico caution that the USMCA review will inevitably introduce volatility, which could weigh on the peso.

A more significant concern is speculative positioning. According to a note from strategists led by Ociel Hernandez, bets on the peso have reached their highest level since 2024. This makes the currency highly "vulnerability to any deterioration in sentiment," meaning any negative headlines could trigger a sharp reversal.

While the trade talks may not derail the currency long-term, investors should brace for turbulence as negotiations unfold.

Global Tailwinds Powering the Rally

The peso's strength isn't solely a domestic story. It's part of a broader trend lifting assets across developing nations as the U.S. dollar sinks to a four-year low.

Latin American currencies, in particular, have led gains this year. Ivan Riveros, a strategist at Citigroup, attributes this to a rally in commodities and a "huge wave into carry." This trend is widely expected by major banks to continue into 2026, providing a solid foundation for the peso.

Luis Estrada, a strategist at RBC Capital Markets, predicts the peso could strengthen to 17 per dollar this quarter. He believes that if the dollar continues to weaken, the market will likely look past the immediate risks associated with the USMCA negotiations. For now, the powerful momentum from global macro trends appears to be overriding political uncertainty.