Mexican Peso: Pay attention to the factors from the United States
2024-03-15
■ Since 2020, the Mexican peso has been the strongest-performing major currency, but the headwind may come from the United States
■ From a domestic perspective in Mexico, the interest rate cuts and presidential/federal parliamentary elections in the first half of the year may not lead to a depreciation of the peso
The article will focus on the strong Mexican peso in 2024. From the beginning of 2020 to March 13th this year, the peso has risen by 12.0% against the US dollar and 54.4% against the Japanese yen, showing the strongest performance among major currencies (followed by the Swiss franc). During this period, the Central Bank of Mexico (BOM) started to raise interest rates earlier than the Central Bank of Brazil (BCB) (Mexico: June 2021, Brazil: March the same year) to deal with inflation. As a neighbour of the United States with a stable economy, it maintained a stronger economy than expected, even after experiencing COVID-19. This geographical factor also contributed to the appreciation of the peso.
The two main factors currently focused on the peso are financial policy and political dynamics. Firstly, there is financial policy, and people will pay attention to the results of the financial policy conference to be announced on March 21st. At the last February financial policy meeting, the forward-looking guidelines for the statement were revised, on February 28th, Mexican Central Bank Governor Rodriguez stated that she was "considering adjusting policy rates at future financial policy meetings.". In addition, according to the February Consumer Price Index (CPI) released on March 7th, the year-on-year increase rate has slowed to 4.40%, and there is an expectation of a rate cut in March in the market. However, even if interest rate cuts begin in the future if inflation continues to decline, the current real policy interest rate (nominal policy interest rate CPI year-on-year increase rate) of about 6% may still slightly decrease. According to the rate of interest rate cuts, the likelihood of the peso depreciating at the beginning of the cut is relatively low.
Next is political dynamics, and people will closely monitor the presidential and federal parliamentary elections on June 2nd. Although current President Lopez Obrador cannot run again according to regulations, it can be seen in this article that the policies of low-income groups are supported, and the candidate for the left-wing ruling party "MORENA" (former mayor of Mexico City), Sean Baum, is in a leading position. The candidate is considered a confidant of the current president and has stated to continue implementing the current government's policies. Although the constitutional amendment submitted in February sparked large-scale protests, if the current ruling party obtains the necessary two-thirds majority of seats in the federal parliament, political stability may also lead to the appreciation of the peso.
We should also pay attention to trends in the November US presidential election this year, a possible factor that could become a headwind for the peso. Specifically, if the probability of former President Trump's election significantly increases. During former President Trump's tenure, the instability of the peso significantly increased from renegotiating the North American Free Trade Agreement (NAFTA) in July 2017 to the United States-Mexico-Canada Agreement (USMCA) in October 2018. Considering the trend of the economy and the US dollar, the peso may be more susceptible to factors from the United States.
■ From a domestic perspective in Mexico, the interest rate cuts and presidential/federal parliamentary elections in the first half of the year may not lead to a depreciation of the peso
The article will focus on the strong Mexican peso in 2024. From the beginning of 2020 to March 13th this year, the peso has risen by 12.0% against the US dollar and 54.4% against the Japanese yen, showing the strongest performance among major currencies (followed by the Swiss franc). During this period, the Central Bank of Mexico (BOM) started to raise interest rates earlier than the Central Bank of Brazil (BCB) (Mexico: June 2021, Brazil: March the same year) to deal with inflation. As a neighbour of the United States with a stable economy, it maintained a stronger economy than expected, even after experiencing COVID-19. This geographical factor also contributed to the appreciation of the peso.
The two main factors currently focused on the peso are financial policy and political dynamics. Firstly, there is financial policy, and people will pay attention to the results of the financial policy conference to be announced on March 21st. At the last February financial policy meeting, the forward-looking guidelines for the statement were revised, on February 28th, Mexican Central Bank Governor Rodriguez stated that she was "considering adjusting policy rates at future financial policy meetings.". In addition, according to the February Consumer Price Index (CPI) released on March 7th, the year-on-year increase rate has slowed to 4.40%, and there is an expectation of a rate cut in March in the market. However, even if interest rate cuts begin in the future if inflation continues to decline, the current real policy interest rate (nominal policy interest rate CPI year-on-year increase rate) of about 6% may still slightly decrease. According to the rate of interest rate cuts, the likelihood of the peso depreciating at the beginning of the cut is relatively low.
Next is political dynamics, and people will closely monitor the presidential and federal parliamentary elections on June 2nd. Although current President Lopez Obrador cannot run again according to regulations, it can be seen in this article that the policies of low-income groups are supported, and the candidate for the left-wing ruling party "MORENA" (former mayor of Mexico City), Sean Baum, is in a leading position. The candidate is considered a confidant of the current president and has stated to continue implementing the current government's policies. Although the constitutional amendment submitted in February sparked large-scale protests, if the current ruling party obtains the necessary two-thirds majority of seats in the federal parliament, political stability may also lead to the appreciation of the peso.
We should also pay attention to trends in the November US presidential election this year, a possible factor that could become a headwind for the peso. Specifically, if the probability of former President Trump's election significantly increases. During former President Trump's tenure, the instability of the peso significantly increased from renegotiating the North American Free Trade Agreement (NAFTA) in July 2017 to the United States-Mexico-Canada Agreement (USMCA) in October 2018. Considering the trend of the economy and the US dollar, the peso may be more susceptible to factors from the United States.