12:11 PM EDT, 06/03/2025 (MT Newswires) -- In May, the Mexican peso (MNX) appreciated from 19.599 to 19.409, noted MUFG.

Mexico's central bank (Banxico) at its meeting in May cut the key policy rate by 50bps to 8.50%, the third consecutive 50bp cut this year after five 25bp cuts last year.

The peso gained again in May and was the top-performing Latin American currency, helped by the United States-China trade conflict de-escalation announced on May 12, wrote the bank in a note to clients. The de-escalation has once again raised expectations that the Trump Administration talk tough but ultimately pulls back from extreme policies due to the potential damage to the U.S. economy.

The peso is now at its strongest levels versus the US dollar (USD) since October last year, stated MUFG. The economy managed to expand by 0.2% in Q1, although the outlook remains highly uncertain given the unpredictable nature of economic policy in the US.

Still, the relatively subdued inflation backdrop allowed Banxico to cut rates again, which is helping diminish investor concerns over the growth outlook ahead.

The impact of this U.S. policy uncertainty is likely to become more apparent, especially if the U.S. escalates the conflict with Mexico. The International Monetary Fund in April cut Mexico's 2025 GDP forecast from a 1.4% growth to a 0.3% contraction.

However, Banxico was very dovish and is likely as such to continue cutting rates, which will take away a key element of support for MXN and make it more vulnerable to the downside, added the bank.

Mexico could also suffer from the proposed tax on remittances that is being proposed in the U.S., pointed out MUFG. Remittances are substantial to Mexico, totalling $64.75 billion in 2024 -- the vast bulk of which came from the U.S.

The bank's sense is that a lot of optimism is now priced into MXN and the downside risks are far greater from these levels going forward. Even though Mexico may do better than expected with tariffs, MUFG still expect a U.S. slowdown and high uncertainty, which will likely result in some MXN depreciation ahead.

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