Background on the Mexican Peso and its Recent Performance
The Mexican peso has maintained a positive trend against the US dollar for three consecutive weeks, appreciating by 2.53% since the beginning of the year. This upward movement can be attributed to several factors, including a weakened dollar, the Federal Reserve’s interest rate cut, and anticipation of the Bank of Mexico’s (Banxico) decision.
Key Factors Driving the Peso’s Appreciation
- Weakened US Dollar: The Intercontinental Exchange’s Dollar Index (DXY), which compares the dollar to a basket of six reference currencies, fell by 0.59% to 98.40 points during the week.
- Federal Reserve’s Interest Rate Cut: The Fed reduced its benchmark interest rate, which is expected to further support the peso’s appreciation.
- Anticipation of Banxico’s Decision: Market participants expect a 25 basis points reduction in Banxico’s reference rate, bringing it down to 7.00%. This would be the eighth reduction of the year and the twelfth consecutive cut.
Analysts’ Perspectives on the Peso
According to Banorte analysts, the upcoming Banxico decision will significantly influence the peso. They anticipate a 25 basis points reduction in the reference rate, placing it at 7.00%. This stance is shared by most analysts and is widely expected by the market.
Banorte’s experts believe that the peso will remain relatively strong in the coming year, which is crucial for curbing import price increases and controlling inflation expectations.
Investor Confidence in the Peso
Investors in Chicago are optimistic about the peso’s appreciation against the dollar, with positions favoring the Mexican currency reaching their highest level since June 2023 in the Chicago Mercantile Exchange (CME).
- Net Long Positions Increase: For the fourth consecutive week, net long positions on the peso rose by 11.14% or 9,600 contracts, increasing from 86,200 to 95,800 contracts.
- Best Level Since June 2023: These net long positions are at their highest since the week ending June 16, 2023, when they closed at 119,000 contracts. Year-to-date, net long peso contracts have surged by 409.6% or 77,000 units.
Geopolitical Developments and Their Impact on the Peso
Despite heightened geopolitical tensions during the week, the peso continued to appreciate, thanks to a weak dollar. Key developments include:
- Mexican Tariff Reform Advancement: The tariff reform bill progressed in Congress, aiming to strengthen tax collection and modify Mexico’s trade structure. However, this move has also introduced tensions with key partners.
Key Questions and Answers
- What is driving the Mexican peso’s appreciation? The weakened US dollar, Federal Reserve’s interest rate cut, and anticipation of the Bank of Mexico’s decision are key factors.
- How do analysts view the upcoming Banxico decision? Analysts from Banorte expect a 25 basis points reduction in the reference rate, placing it at 7.00%, which would be the eighth reduction of the year and twelfth consecutive cut.
- What are investors’ sentiments regarding the peso? Investors in Chicago are optimistic about the peso’s appreciation against the dollar, with net long positions reaching their highest level since June 2023.
- How have geopolitical developments affected the peso? Despite heightened tensions, the peso has continued to appreciate due to a weak dollar. Key developments include Mexico’s tariff reform progress and associated tensions with key partners.
