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The Mexican peso weakened to near 18.6 per USD from the three-week high of 18.5 touched on November 9th amid prospects of a narrower US-Mexico interest-rate differential. Hotter-than-expected US inflation in October reinforced expectations of further Federal Reserve hikes. A narrower rate differential would pressure the peso by reducing carry trade. Still, recent data limits the room for looser policy by Banxico. Annual inflation rose to 3.75% from 3.45% in September, above forecasts of 3.65%, moving further above Banxico’s 3% target. Core inflation edged up to 3.80% from 3.75%, broadly in line with forecasts of 3.78%. The central bank unexpectedly cut its benchmark rate to 6.25% at its latest meeting and revised forward guidance, signaling rates would remain at the new level for an “extended period.” Meanwhile, the Democratic Party’s victory in the US midterm elections could soften trade pressures on Mexican growth.

The Mexican peso rebounded to 18.5 per USD from the 17-month low of 18.86 on October 29th as higher inflation supported a hawkish Banxico. Annual inflation rose to 3.75% from 3.45% in September, above forecasts of 3.65%, moving further above Banxico’s 3% target. Core inflation edged up to 3.80% from 3.75%, broadly in line with forecasts of 3.78%. Elevated inflation could prompt Banxico to adopt a more restrictive stance, supporting the peso by widening the US-Mexico rate differential and favoring peso-denominated carry trades. However, Banxico unexpectedly cut its benchmark rate to 6.25% at its latest meeting and revised forward guidance, signaling rates would remain at the new level for an “extended period.” Meanwhile, Democratic midterm wins in the US could constrain some of President Trump’s foreign trade policy decisions, supporting the peso. USMCA-compliant goods were exempted from Trump administration tariffs, additional tariffs remained on steel, aluminum and automotive imports.

The Mexican peso strengthened to around 18.6 per USD in November, recovering from a slump triggered by Banxico’s unexpected cut of its benchmark rate to 6.25%. The narrower rate differential with the US Federal Reserve reduces the appeal of peso-denominated carry trades, weighing on the currency. Banxico also revised its forward guidance, signaling that rates would remain at the new level for an “extended period.” The peso partially recovered after the post-decision move amid optimism over US-Mexico trade talks. Democrats won a majority of congressional seats in the US midterm elections; a Democratic majority could constrain some of President Trump’s trade policy decisions. While USMCA-compliant goods were exempted from Trump administration tariffs, additional tariffs remained on steel, aluminum and automotive imports.