These countries are benefiting from US trade chaos

When Trump threatened to stoke the trade fires earlier this year, things weren’t looking good for major Latin American countries. Now, US trade policy is actually a tailwind, while the Mexican peso and Brazilian real are benefiting from high interest rates.

Shortly after moving into the White House, President Donald Trump imposed a 25% tariff on all goods from Canada and Mexico. It came as no surprise that he is setting his sights on our southern neighbor, among other things. During his first term in office, he had a high wall built between the two countries. As is often the case when Trump bombastically announces a new campaign, the soup is eaten a lot less hot than it is served. Last week, Mexican Minister of Economy Marcelo Ebrard said that the average American import tariff on cars assembled in that country actually comes to about 15%. That is slightly less than half of the 27,5% that European car exporters pay.

Unexpected advantage
Trump's erratic trade policy actually creates a small advantage for the Mexican car sector. This windfall could be quite significant, since car manufacturers contribute no less than 4% to GDP. However, no growth miracles can be expected from Mexico for the time being. The policy rate of 8,5 makes consumers and companies think twice before borrowing money for a major purchase or new investments. Incidentally, the interest rate was still 9% two weeks ago. The Mexican central bank reduced the rate slightly in mid-May. Inflation is moving abruptly towards the policy target of 3%. The high interest rate also makes it attractive for parties to keep their assets in Mexican pesos.

Interest rate to almost 15 percent
The Brazilian real also benefits from such an interest rate advantage. Earlier this month, the central bank in Brasilia raised the most important rate to as much as 14,75% in May. With the sixth interest rate increase in ten months, the Banco Central do Brasil is trying to bring inflation back within the target range around 3%. Partly because government spending has increased significantly under President Lula da Silva, the budget deficit has risen to more than 10% of GDP. In addition to economic growth of more than 3%, this has also translated into inflation that has crept up from 3,7 to 5,5% over the past twelve months. Lula has now chosen a different course. He wants to put the financial house in order by freezing spending and implementing tax increases.

Warm ties with Beijing
Although the unpredictable tax policy may deter foreign investors, several factors play in favor of the Brazilian economy. For example, Lula has made agreements with Trump on an import duty of only 10%. At the same time, he is grasping the outstretched hand of China with both hands. He even did so literally, after a speech he recently gave in Beijing. All in all, the economies of both countries are doing quite well. But it is mainly the high policy interest rate that is making the peso and the real popular. Since the turn of the year, both currencies have risen by more than 7% against the dollar. As long as Mexico and Brazil escape unscathed in terms of trade, the end of the silent advance is not yet in sight.
 

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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