The Peso’s Losing Streak
The start of 2023 saw the Mexican peso shining bright. However, recent months have brought a change in fortunes. In January, the peso stumbled, depreciating by 1.5% against the US dollar. Currently, the exchange rate is hovering around 17 pesos per dollar. While the peso has shown resilience, analysts warn that further downside risks lie ahead.
Central Bank Signals Change, BNP Paribas Forecasts Weakening
Mexico’s central bank, Banxico, recently opted to hold interest rates steady at 11.25% – a decision widely anticipated by the markets. However, a noticeable shift in communication has emerged. Banxico now suggests that easing may be on the horizon, with the possibility of rate adjustments in upcoming meetings.
BNP Paribas, a leading investment bank, forecasts a more significant easing cycle for Mexico compared to the US. They project Banxico to cut rates by 25 basis points per meeting, reaching a policy rate of 9.25% by 2024 and an eventual terminal rate of 6.25% in 2025. This contrasts with a more gradual easing trajectory expected from the US Federal Reserve.
Elections and Inflation Cast a Shadow
The peso’s path forward is clouded by political uncertainties. The upcoming US presidential election later this year could bring heightened tensions, weighing on the Mexican currency. Furthermore, Mexico’s own presidential election in June 2024 is brewing market anxieties. Polls suggest a closely contested race, historically leading to elevated volatility in the peso around the election period.
On the economic front, while Mexico benefits from the nearshoring trend, inflation remains a concern. Recent data shows a slight uptick in headline inflation to 4.88% year-on-year. Investors will be closely watching this metric for any signs of overheating.
BNP Paribas: Peso to Weaken Further
In light of these factors, BNP Paribas maintains a 3-month target of 18 pesos per dollar and a 12-month target of 18.5. This assessment implies further depreciation of the peso over the course of the year.
Navigating the Choppy Waters
Understanding the forces shaping the peso’s trajectory is essential for businesses and investors with exposure to Mexico. Political developments on both sides of the border, alongside the interest rate policies of central banks, will be the key drivers to watch in the coming months. While Mexico’s economic fundamentals offer positive aspects, the landscape remains complex. Stay tuned – the peso’s journey is likely to be a bumpy one.
FAQ
The peso is weakening due to factors like a potential change in Mexico’s interest rate policy, upcoming elections in both Mexico and the US, and inflation concerns.
Banxico’s signal of potential easing (lowering interest rates) suggests a weaker peso in the future, as it can make the currency less attractive to investors.
BNP Paribas expects a more aggressive easing cycle (interest rate cuts) from Mexico compared to the gradual easing expected from the US Federal Reserve.
Elections create uncertainty. Both the upcoming US election and Mexico’s own 2024 election could increase volatility and put downward pressure on the peso.
BNP Paribas expects the peso to reach 18 pesos per dollar within 3 months and 18.5 pesos per dollar within a year.
A weakening peso means Mexican goods become cheaper for US buyers, but it also means that US goods become more expensive in Mexico. This impacts trade balances and profits.
Nearshoring is the practice of relocating business operations closer to home – for the US, this often means Mexico. This trend benefits Mexico economically.
