Repeats story published Jan. 26.
All that tweeting Donald Trump is doing about Mexico might be setting it up for the perfect revenge.
The Mexican peso, which is down almost 12% against the dollar since Trump's election on November 8, fell almost 1% on Thursday after Press Secretary Sean Spicer suggested the president might seek to slap a 20% tariff on Mexican imports. Mexico's best course of action in seeking retaliation against Trump may be to let the peso drop even farther.
The Mexican central bank intervened at the start of the year to halt the peso's skid, but in the future, it doesn't have to. The government could instead allow the peso to weaken naturally.
While such a move would be a risk to the markets in Mexico and the United States -- and might not be particularly good for the Mexican government -- the central bank could allow the peso to depreciate so much that it essentially nullifies Trump's 20% tax for Mexican exporters.
"If [the Mexican government] lets the Mexican peso depreciate, Mexico will be more competitive in terms of exports to the U.S.," said Alfredo Coutino, Latin America director at Moody's Analytics.
He offered the example of an avocado.
The United States is the top export market for Mexico, consuming between 77% and 79% of total exports. The United States imported $1.5 billion in Hass variety avocados from Mexico in 2015 alone.
Say an avocado sent from Mexico to the United States cost 50 cents last year, when the exchange rate was at 20 Mexican pesos per dollar. If the peso were to depreciate to 25 pesos per dollar, about 20%, Mexican producers could easily maintain the 50-cent price, or increase it a cent or two, essentially passing the cost off onto the American consumer.
"This 50 cents for Americans is going to be cheaper in terms of pesos," said Coutino.
Essentially, Mexican exports stay competitive anyway, and could even gain some ground.
The U.S. could, of course, accuse Mexico of currency manipulation -- Trump has made such threats against China -- but in this instance, he probably wouldn't have a case.
If the Mexican government declines to intervene as the peso depreciates amid the U.S trade threats, there won't be grounds for claiming currency manipulation. And the more punitive actions the Trump administration takes -- tariffs, taxes, threats, tweets -- the farther down it goes, and the greater the advantage for exports.
"This is one of the main measures that I see that Mexico could use a defense mechanism," said Coutino.
