The Mexican peso appreciated for a fifth consecutive day on Monday to close at its strongest level against the U.S. dollar since 2020.
Buoyed by the expectation that the Bank of México (Banxico) will raise its benchmark interest rate by an additional 75 basis points on Thursday, the peso was selling at just under 19.45 to the dollar at the close of trading on Monday.
Banxico data shows that the exchange rate was the strongest end-of-day position for the Mexican currency since March 2020, when the cost of a greenback dipped below 19.4 pesos.
The peso appreciated 0.36% on Monday, increasing its gains over the past five trading days to 1.82%. It had weakened slightly to about 19.5 to the dollar at 9 a.m. Central Time on Tuesday.
Gabriela Siller, director of economic analysis at Banco Base, said that the current strength of the peso is related to the expectation that the Bank of México will once again follow the lead of the U.S. Federal Reserve and raise its key rate by 0.75%.
Banxico holds its monetary policy meetings the week after the Fed makes its rates announcements, and appears likely to match the U.S. central bank’s 0.75% hikes for a fourth consecutive time this Thursday as inflation – 8.5% in the first half of October – remains well above its target rate. The official interest rate in Mexico would thus reach 10%, more than double the 3.75-4% range in the U.S.
Siller said that another factor contributing to the peso’s strength is that significant amounts of money are flowing into Mexico in the form of payments for Mexican exports, remittances and foreign direct investment.
In addition, “the dollar has weakened a little” because the Fed is nearing the end of its tightening cycle, she said.
“Few interest rate increases remain, and even though there continues to be a restrictive monetary policy [in the U.S. for now], the light at the end of the tunnel is now visible,” Siller said.
The analyst said that the peso could strengthen further if Banxico lifts rates by more than the predicted 0.75% this Thursday, or if it indicates in its monetary policy statement that it will continue along an aggressive tightening path. Such a scenario could see the peso strengthen to 19.2 to the dollar, Siller said.
Looking further into the future, the deputy director of economic analysis at the brokerage house Vector said that the Fed is likely to start cutting rates before Banxico, and such a situation would benefit the peso.
“It’s becoming increasingly clear to the market that when we reach the interest rate peak in Mexico and the United States, it’s very probable that the United States will think about lowering … [rates] before Mexico. … That issue … helps the exchange rate [here],” Luis Adrián Muñiz said.
Muñiz, Siller and Monex analyst Janneth Quiroz – all of whom were cited in an El Economista newspaper report – agreed that the peso could also benefit from an additional decrease in the inflation rate in the United States. If data to be published this Thursday shows that the annual rate in the U.S has declined for a fourth consecutive month, the dollar will weaken, giving the peso more scope to appreciate, they said.
The British bank Barclays offered a rosy forecast for the peso late last month, saying that it could appreciate to 19 to the U.S. dollar by the end of next year. In contrast, Moody’s Analytics said earlier in October that the peso could depreciate 20% against the U.S. dollar in the coming months due to tightening monetary policy in the United States.
The peso has been one of the best performing currencies in 2022, gaining over 5% against the dollar at a time when many other currencies have lost ground against the greenback, which is seen as a safe-haven currency in times of economic uncertainty.