Introduction
The Mexican peso appreciated against the US dollar at the end of the week’s trading session. The local currency gained strength due to a weakening dollar following the release of US inflation data that maintained expectations for interest rate cuts.
US Inflation Data
The Personal Consumption Expenditure (PCE) price index, a preferred inflation measure by the Federal Reserve, increased 0.3% in August and 2.7% year-over-year. These figures support the market’s anticipation of two more interest rate cuts this year.
- Fed Watch Data: According to the Fed Watch tool by CME, there is an 85.5% probability of a 25-basis-point rate cut by October, and a 67.3% probability for another adjustment in November.
- Analyst Perspective: Felipe Mendoza, market analyst at ATFX Latam, stated that stable US PCE data helped curb the dollar’s surge (triggered by strong US economic figures released earlier) and bolstered emerging market currencies.
Weekly Performance
Over the week, the Mexican peso showed a slight gain. Compared to last Friday’s closing rate of 18.3878 pesos per dollar, today’s data implies a 2.76-centavo (0.15%) improvement for the currency.
The peso’s advance occurred despite the Bank of Mexico reducing its reference interest rate by 25 basis points yesterday, in line with expectations, to bring it down to 7.50%. This marks a total reduction of 375 basis points since the cycle’s beginning earlier in 2024.
Mendoza further explained, “The fact that Mexico still offers relatively high real yields compared to its emerging market peers maintained solid carry trade demand, allowing the peso to absorb the interest rate cut news without a significant weakening.”
Market Impact and Conclusion
The weakening dollar, coupled with stable US inflation data and expectations of further interest rate cuts, contributed to the Mexican peso’s appreciation. The Bank of Mexico’s recent interest rate reduction did not negatively impact the currency due to Mexico’s comparatively high real yields against other emerging markets.
