Peso strengthens to its highest level versus the dollar in over a year following a federal rate cut.
The Mexican peso has been on a winning streak, appreciating against the US dollar for nine consecutive trading days. This recent surge has brought the peso to 18.20 to the US dollar before weakening slightly on Wednesday.
The current appreciation of the peso could potentially benefit from additional interest rate cuts in the United States. On Wednesday, the U.S. Federal Reserve cut its benchmark interest rate by a quarter of a percentage point, lowering it to a range of 4%-4.25%. This move has widened the gap between the Fed's interest rate and that of the Bank of Mexico, which is currently set at 7.75%.
Enrique Quintana, editor-in-chief of El Financiero, wrote that the peso is supported by a still-wide interest rate differential compared to the United States. He also noted that a narrative of macroeconomic stability is at play in Mexico, including strong reserves, prudent management of public debt, and a current account backed by manufacturing exports, remittances, and projects linked to nearshoring.
Analysts forecast the Mexican Peso (MXN) to trade slightly weaker against the US Dollar in 2025, with the USD/MXN exchange rate expected around 18.66 over the next 12 months. This outlook considers a likely further rate cut by the Bank of Mexico, following a 25 basis point cut to 7.75% in August 2025, signaling a near end to easing amidst inflation concerns. Potential interest rate cuts in the US could also influence capital flows and the Peso's value.
The Mexican peso's performance generally improves when the Bank of Mexico's interest rate is significantly higher than that of the Fed, encouraging foreign capital inflows and increasing demand for the peso. The Bank of Mexico's end-of-day USD:MXN exchange rate on Wednesday was 18.32, an appreciation of 0.2% compared to the closing rate on Monday.
Quintana wrote that as long as doubts linger over Washington's fiscal policy and the independence of the U.S. central bank, confidence in the dollar will continue to erode. For global capital seeking returns with limited risks, Mexico appears relatively solid, according to Quintana.
The backdrop of the 'super peso' is more than a triumph for Mexico, according to Quintana, as it reflects the weakness of the hegemonic currency. The last time the peso was stronger was on July 23, 2024. In the period of nine trading days, the peso has appreciated by 14% against the US dollar.
Analysts predict the Mexican peso's performance in 2025, but specific expectations are not provided in the given text. However, they forecast a slight weakening of the peso against the US dollar in 2025, with the USD/MXN exchange rate expected around 18.66 over the next 12 months. This outlook considers a likely further rate cut by the Bank of Mexico, following a 25 basis point cut to 7.75% in August 2025, signaling a near end to easing amidst inflation concerns, and potential interest rate cuts in the US that could influence capital flows and the Peso's value.
The Bank of Mexico is expected to ease its monetary policy as well in 2025. The Fed's rate cut widens the gap between its interest rate and that of the Bank of Mexico, which could potentially continue to attract foreign capital into Mexico and support the Mexican peso.
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