The Mexican peso is facing a high risk of going beyond 25 to 1 U.S. dollar if the North American Free Trade Agreement (NAFTA) is scrapped, Continuum Economics, a consultancy firm, said on Wednesday.
In its new report, Pedro Tuesta, Latin American economist, said that should NAFTA remain in place, the Mexican peso will trade within a range of 19.5-20.5 to the dollar in coming months.
"We believe that a possible breaking of NAFTA could pressure the peso above 22 peso (to the dollar), with a risk of passing 25 pesos," he wrote.
Tuesta highlighted that Canada and Mexico announced retaliatory tariffs against the U.S. after the administration of President Donald Trump imposed 25 percent tariffs on steel imports and 10 percent on aluminum imports against its NAFTA partners and the EU from June 1.
On Tuesday, the director of the U.S. National Economic Council, Larry Kudlow, said that Trump is seriously considering scrapping NAFTA and beginning bilateral trade talks with Canada and Mexico separately.
According to Tuesta, "the Mexican peso and the Canadian dollar will weaken initially after the news.
However he noted that "Mexico and Canada have rejected bilateral talks and have insisted in a trilateral negotiation."
On Wednesday morning, the peso was trading at 20.25 to the dollar, an appreciation of 1.04 percent over Tuesday. In international operations, the peso reached a high of 20.49 to the dollar, a level that has not been seen since Feb. 20, 2017.
