President Trump’s animosity with Mexico regarding immigration is known to all since his campaign days. Naturally, Mexican peso nosedived to an all-time low after Trump's victory in the U.S. presidential election due to his plans of building a wall along the border of Mexico. Trump, in fact, announced plans of making Mexico cover the expenses for the wall. iShares MSCI Mexico Capped ETF (EWW - Free Report) has lost 20% over the past two years (as of Jun 4, 2019).
In late May, trade conflict between the United States and Mexico heightened. Trump has announced tariffs on all goods imported from Mexico in order to curb illegal immigration. He said that the first round of tariffs will be put into effect on Jun 10 at 5%.
The Trump administration further warned that if Mexico does not bar “illegal migrants” from entering the United States, tariffs would go up to 10% by July, 15% by August, 20% by September and reach a permanent level of 25% by October. A group of Trump supporters has begun building the first privately constructed US-Mexico border wall (read: Full-Blown Trade Spat: 5 Most-Vulnerable Sector ETFs & Stocks).
Notably, May is likely to be the highest month in crossings in over 12 years and will significantly surpass the record 109,000 set in April, said Kevin McAleenan, the acting Secretary of Homeland Security (read: After China, US Hits Mexico With Tariffs: ETFs Under Threat).
How Painful the Tariffs Would Be
“Mexico is America’s third-largest trade partner, with $346.5 billion in goods imported from Mexico in 2018, according to the U.S. Trade Representative,” as quoted on marketwatch.com. As much as 80% of the country’s exports move to the United States.
Several auto companies have manufacturing hubs in Mexico. Companies like Ford Motors (F - Free Report) and General Motors (GM - Free Report) outsource their car production to Mexico. The country is also a regional manufacturing hub for major Japanese and South Korean automakers that assemble and export cars to the United States. So, adverse impact of the tariff is understandable.
Following the news, the peso suffered its steepest single-day decline in seven months on May 31, with about a 3% slump while EWW lost as much as 5.4% on the day before recouping some of the losses. The loss was the maximum since Nov 26, per Bloomberg.
Investors should note that the United States also had steel and aluminum tariffs levied on Mexico. But in May, the United States has reached a deal to lift steel and aluminum tariffs on Canada and Mexico.
ETFs Under Threat
Due to prevailing uncertainty, one should skirt Mexico ETFs like EWW (down 1.6% in the past five days), Direxion Daily MSCI Mexico Bull 3X Shares (MEXX - Free Report) (down 6%) and FranklinFTSE Mexico ETF (FLMX - Free Report) (down 1.1%). However, due to the currency-hedging benefit, iShares Currency Hedged MSCI Mexico ETF (HEWW - Free Report) has gained 0.8% in the past five days (as of Jun 4, 2019).
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