After a calm trading day yesterday, the markets declined sharply after Donald Trump sent a tweet condemning Mexico for the immigration crisis at the southern border. In the tweet, he said that the US will impose a 10% tariff on all goods from Mexico to the United States. The tariff will go up to 25% in October if the country will not have done enough to solve the migration crisis.
In the 2016 campaign, Trump campaigned on immigration issues. He said he would deport all illegal aliens and build a wall at the southern border. A few months before the next election, he has little to show for that promise. There is no wall, and the number of illegal aliens in the US have continued to increase.
The threat to increase tariffs on Mexican goods comes at a tough time for the president. His trade deal with China has crumbled and data from the US government showed that the trade deficit has continued to widen. Further, US, Canada, and Mexico have moved to ratify the USMCA deal. The deal will be a modification of the previous NAFTA agreement that was there for decades. Parliaments of both Mexico and Canada are expected to approve the bill. However, in the US, with the divisions currently between democrats and republicans, it is highly possible that the deal will not be passed.
A trade conflict with Mexico will be bad for both countries. This is because 38% of all Mexican exports move to the United States. In addition, Mexico is an important importer of American goods like soybeans and corn. At a time when the price of farm products is declining, a trade conflict with Mexico will mean additional problems for the farmers. Farmers played an important role in electing Donald Trump.
It will also work in contrary to Trump’s goal on immigration. This is because with tariffs, Mexico could stop cooperating with the US, which will flood the US with more illegal immigrants.
In response to the announcement, the Mexican peso declined sharply as shown on the chart below. On the one-year chart below, the price moved to levels above the 25-day and 50-day moving averages. The Relative Strength Index (RSI) continued to rise and reached the overbought level. The pair will likely test the important support level of 20.