Mexican Peso Weakens Toward One-Year Low

The Mexican peso weakened to around 18.4 per US dollar in October, nearing a one-year low and tracking gains by the US currency against other emerging-market currencies. The dollar strengthened amid expectations of further Fed tightening, as elevated inflationary pressures stemming from the Middle East situation coincided with resilient US economic performance. The narrowing interest-rate differential is also undermining the appeal of the Mexican currency. Narrower yield spreads between Mexico and developed economies, combined with expectations that Banxico will keep monetary policy stable, are reducing the incentive for peso carry-trade strategies.

The Mexican peso weakened to around 17.7 per US dollar in late September, reaching a five-month low after the Bank of Mexico left its benchmark interest rate unchanged. Banxico kept its benchmark rate at 6.50% at its September meeting, marking a shift from the Fed’s latest move, when the US central bank raised the cost of credit. Banxico said in its statement that its future decisions would not necessarily follow those of the Federal Reserve. The Fed is expected to raise rates in October. Banxico’s stance could reduce the appeal of peso-denominated assets and the currency for carry-trade operations, as the interest-rate differential would narrow further. A narrower differential reduces the currency’s buffer against periods of international volatility. Meanwhile, Mexico’s unemployment rate stood at 3% in August, matching forecasts and only 0.1 percentage point higher than in July. A tight labor market could boost consumer demand and lead Banxico to adopt a more hawkish stance.

The Mexican peso weakened to near 17.2 per US dollar after touching a more than two-year high of 16.98 on September 11th, following the US Fed’s decision to raise interest rates. The Fed increased its federal funds target rate by 25 bps to 3.75%-4.00%, as widely expected, while a majority of FOMC members projected another hike this year. The narrowing interest-rate differential is supporting the dollar. Mexico’s central bank left its benchmark rate unchanged at 6.50% at its August meeting, noting that inflation is expected to continue declining gradually and converge to the 3% target in the fourth quarter of 2027. Banxico also highlighted that Mexico’s economy rebounded in the second quarter after contracting in the previous quarter, although downside risks to growth persist. The board reiterated that it expects to keep the benchmark rate at its current level amid uncertainty over geopolitical conflicts, global trade policies, and their potential impact on inflation.