Latin American currencies fell most against the dollar among their emerging market peers in May as President Donald Trump's trade war with China intensified and he unexpectedly threatened to slap tariffs on Mexican imports if they did not curb illegal immigration to the U.S.
The Colombian peso was the biggest faller in the month, dropping 4.01% against the dollar, closely followed by the Chilean peso with a 3.95% drop. The Mexican peso slid 2.93% after shedding 2.72% on May 31 alone following Trump's surprise announcement. The Chinese yuan declined 2.45%, and the Argentine peso fell 2.3%.
Trump took to Twitter on May 30 to announce tariffs of 5% on Mexican goods from June 10 unless illegal immigration from Mexico stops. This tariff rate would increase by five percentage points each month unless "the illegal immigration problem is remedied." The announcement was reportedly made against the advice of aides including Trade Representative Robert Lighthizer. The Mexican peso weakened 0.5% to 19.7065 at 10 a.m. ET.
Peter Kinsella, senior foreign exchange and rates strategist at UBP, said he "could see higher levels of 21, maybe even 22," noting that the Mexican central bank is unlikely to intervene by raising rates. The base rate is already elevated at 8.25%, and inflation has been declining in general, although rising Easter tourism saw price rises increase to 4.4% in April from 4% in March.
Trump's hard-line stance on trade relations with Mexico should prove to be a warning for China, according to Kinsella. "He's picking on the Mexicans now because he isn't making any progress with the Chinese. It indicates you're not going to see any improvement in relations with China or progress on trade talks."
The apparent breakdown in relations between China and the U.S., just as it appeared a trade deal was close, hit the Chinese currency. The yuan had a weak month, edging closer to seven to the dollar, a level the Chinese central bank has typically defended by using some of its roughly $3 trillion of foreign-exchange reserves.
Kinsella said the move against Mexico meant it was now very unlikely that the U.S. and China will agree to a deal in the near term. "It indicates that any trade agreement basically isn't worth the paper it's written on."
An ongoing trade dispute between the world's two largest economies would spell trouble for emerging markets, which are particularly vulnerable to reduced global trade.
Bank of America Merrill Lynch wrote in a research note that the People's Bank of China has limited the extent to which emerging-markets currencies have devalued. "Clearly, PBOC's attempt to keep USD/CNY capped through stable fixings has played a big role in making sure that emerging market FX depreciation expectations do not get out of control." The bank expects Chinese authorities will have to inject more liquidity into the system amid deteriorating economic data and capital flows.
Net capital outflows in emerging markets totaled $5.7 billion in May, according to estimates by the Institute of International Finance Inc., down from inflows of $32.6 billion in March and $38 billion in April.
Prolonged trade uncertainty hit Asian emerging market currencies as well. Korea, which relies heavily on exports of semiconductors and has suffered from weakness in China's economy, saw its currency shed 1.97% in May, while the Taiwanese dollar lost 2.03%.
Martin Enlund of Nordea Bank compared buying Asian foreign exchange to "picking up pennies in front of a steamroller" with Trump's threats of a "full-blown digital iron curtain looming."
By contrast, the fortunes of the Turkish lira were turned on their head. Having been the worst performing emerging market currency in 2019 alongside Argentina's peso, a perceived improvement in relations with the U.S. saw market sentiment improve as the lira gained 2.06% in May to be the best-performing emerging market currency.