The (empty) threat of tariffs. How far can the LatAm FX rally go?

In this note, we examine why LatAm FX crosses have rallied so much recently and how far the rally can go, especially as the market takes the threat of tariffs less seriously. We use the probability of Trump winning the election in the past to estimate the impact of tariffs on LatAm FX. We find it to be a useful proxy, allowing us to estimate different scenarios of tariff threats . Our main finding is that when the market prices out the high tariff scenario, the MXN has a lot of room to appreciate while the COP and PEN have significantly less room to strengthen. Interestingly, if the tariffs are completely removed, we find that the CLP and BRL could appreciate more than the COP and PEN, but less than the MXN.