(Bloomberg) -- The Mexican peso fell more than 1% as the currency reeled from a one-two punch, the first from ratings agencies and the second from inconclusive trade talks with the U.S.
Moody's Investors Service came first, cutting the country's outlook to negative from stable, followed by Fitch, which lowered the sovereign rating to BBB from BBB+. Minutes later, the first reports of a failure in the trade talks appeared.
Read More: Trump Says ‘Not Nearly Enough' Progress in Talks With Mexico
In their decision to downgrade, Fitch cited the increased risk to Mexico's public finances from state oil company Pemex's deteriorating credit profile, along with ongoing weakness in the country's economy. At the same time, the failure of trade talks means that Mexican goods could be hit with 5% tariffs starting Monday -- tariffs that would increase monthly up to a maximum of 25%.
Investors "need to price the first 5% tariff set to start June 10 and gradually the risks for that to increase in July -- and beyond," said Alejandro Cuadrado, a senior strategist at BBVA in New York. "We still need details on the negotiations and any measures that the U.S. specifically pursues since the measure is very broad."
The peso was 0.6% lower at 19.7031 per dollar as of 11:29 a.m. in Moscow, the biggest decliner among emerging-market peers, but paring earlier losses after President Donald Trump said talks would resume on Thursday.
Participants of a Citigroup Inc. survey lowered their forecast for the peso for a second consecutive fortnight. They now expect the peso to be at 20.25 per dollar by the end of the year and 20.50 at the end of 2020 from 20 and 20.25 previously, analysts led by Sergio Luna said in a note on Wednesday.
In a press conference after the meeting, Mexican Foreign Minister Marcelo Ebrard said that he was optimistic about Thursday's talks and that negotiators wanted to prevent tariffs for both economies.
Trump's comments offer "some hope and relief," said Cuadrado, adding that specifics of any potential agreement are unclear. “He still said the higher the tariffs, the more companies will return to the U.S., so the threat remains, with some opening to reverse it."
Trade fears have weighed on Mexican assets since Trump tweeted about his intentions to apply tariffs last Thursday. Many investors worry that the stress may continue as tariffs imperil a trade deal known as the USMCA between the U.S., Mexico and Canada that still needs to be ratified.
--With assistance from Karl Lester M. Yap.
To contact the reporter on this story: Justin Villamil in Mexico City at jvillamil18@bloomberg.net
To contact the editors responsible for this story: Julia Leite at jleite3@bloomberg.net, Philip Sanders
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