Market Dynamics and Fed’s Potential Interest Rate Reduction
The Mexican peso strengthened against the US dollar on Tuesday’s trading, supported by expectations that the Federal Reserve (Fed) will lower its benchmark interest rate during their mid-September meeting.
The exchange rate ended the day at 18.7378 pesos per dollar, marking a 16.91-cent increase or a 0.89% gain compared to Monday’s closing rate of 18.9069 pesos, according to official data from Mexico’s central bank, Banco de México (Banxico).
The dollar’s movement ranged from a high of 18.9481 pesos to a low of 18.7174 pesos, while the Intercontinental Exchange’s Dollar Index (DXY) remained stable at 98.75 points.
Fed Officials’ Comments on Interest Rate Cuts
Mary Daly, president of the Federal Reserve Bank of San Francisco, stated on Tuesday that given growing evidence of a weakening US labor market and the lack of inflationary impact from tariffs, the time for a rate cut is near.
Her comments came after weak nonfarm payroll data on Friday gave the market reasons to bet on a rate adjustment. According to CME Group’s FedWatch tool, there is a 90% probability of a rate cut in September.
Expectations of a Fed interest rate reduction bolster the peso, as the market prepares for Banxico’s policy decision announcement on Thursday. Analysts predict that the Monetary Policy Committee members will vote for a 25-basis-point adjustment.
Mixed Investment Data in Mexico
On the domestic front, it was reported on Tuesday that business investment in Mexico increased by 0.9% in May compared to April, according to the National Institute of Statistics and Geography (INEGI). However, fixed capital formation decreased by 7.1% year-over-year.
Banorte acknowledged in a note, “We recognize that the environment will remain complex in the second half. Nevertheless, we anticipate modest growth in domestic demand. We expect resilience for consumption and a mixed performance in investment.”
Strengthening Ties with Canada
On the trade front, Claudia Sheinbaum Pardo, Mexico City’s head, met with Canadian Ministers of Foreign Affairs Anita Anand and Finance François-Philippe Champagne to discuss strategies for addressing US tariffs.
In line with his trade strategy, US President Donald Trump ordered on Thursday to raise tariffs on Canadian products from 25% to 35%, while granting Mexico a 90-day extension to negotiate a broader trade agreement.
“We are strengthening the relationship between our countries,” Sheinbaum said about the meeting with Anand and Champagne in a message on X. Later, Mexico’s Secretary of Economy Marcelo Ebrard mentioned to journalists that he would discuss tariffs with Champagne.
Key Questions and Answers
- What is the main topic of this article? The Mexican peso’s performance against the US dollar, influenced by expectations of a Federal Reserve interest rate cut and recent developments in Mexico’s investment data and trade relations with Canada.
- Who are Mary Daly and what is her role? Mary Daly is the president of the Federal Reserve Bank of San Francisco. She suggested that a rate cut by the Fed might be imminent due to signs of a weakening US labor market and insufficient inflationary impact from tariffs.
- What are the recent investment trends in Mexico? Business investments in Mexico increased by 0.9% in May compared to April, but fixed capital formation decreased by 7.1% year-over-year.
- What is the current state of Mexico’s trade relations with Canada and the US? Claudia Sheinbaum Pardo met with Canadian ministers to discuss strategies for addressing US tariffs. Meanwhile, President Donald Trump increased tariffs on Canadian products to 35% and extended Mexico’s deadline for a broader trade agreement by 90 days.
