President Trump announced a productive phone call with Mexican President Claudia Sheinbaum, focusing on improved mutual understanding. The U.S. and Mexico have agreed to extend current trade terms for 90 days, which includes a 25% tariff on fentanyl, cars, and a 50% tariff on steel, aluminum, and copper.
Mexico also agreed to remove its non-tariff trade barriers immediately. The countries aim to finalise a broader trade deal within this timeframe or beyond.
Us And Mexico Agreement Details
The call involved top U.S. officials such as Vice President JD Vance, Treasury Secretary Scott Bessent, and Secretary of State Marco Rubio. Both nations also made a commitment to border cooperation on security, drug trafficking, and illegal immigration.
This agreement serves as a temporary measure, with broader discussions to continue leading up to or past the August 1 date.
We see a 90-day delay on major trade changes, which offers a brief period of stability. This temporary certainty should lower implied volatility across key sectors in the coming weeks. For now, the immediate threat of a trade war has been pushed back from the August 1 deadline.
The auto sector, which relies on Mexico for nearly 40% of its imported parts, can breathe easier. We anticipate a near-term rally in names like Ford and GM, making short-dated call options attractive. This relief comes after months of worry, considering our two-way trade in vehicles and parts exceeded $180 billion in 2024 alone.
Steel And Aluminum Tariff Implications
The extension of a 50% tariff on steel and aluminum continues to protect domestic producers like U.S. Steel and Cleveland-Cliffs. Their stock prices should remain supported, but the high tariffs are a negotiating chip that could vanish. This creates significant downside risk three months from now.
Mexico’s immediate removal of non-tariff barriers and the deal’s extension will likely strengthen the peso against the dollar in the short term. However, we remember the sharp swings in the USD/MXN pair during the 2017-2018 USMCA negotiations, so this stability is fragile. The real volatility will reappear as the 90-day deadline approaches in late October.
The smartest move is to look past the immediate calm and focus on that October deadline. We should be pricing in significant volatility for contracts expiring in late October and November. Buying straddles or strangles on ETFs like XME (metals) or even the peso (via PEX) could pay off, as a final deal or a breakdown will cause a major move.
For the broader market, we expect the VIX to drift lower from any recent highs as this specific risk is deferred. This creates an opportunity to purchase cheaper, longer-dated VIX call options, essentially betting on a return of fear. The market is getting a summer reprieve, but the fall is now set for a major trade showdown.
