Mexican Peso Gains on US-Mexico Rate Differential Expectations

The Mexican peso strengthened to around 18.6 per US dollar in October, supported by expectations of a widening US-Mexico interest rate differential. The Federal Reserve is expected to leave rates unchanged at its October meeting, while Banxico is seen adopting a more hawkish stance at its November meeting. Nevertheless, the peso remains near its weakest levels since mid-2025, following a sharp unwinding of carry trades as the interest rate differential between the Fed and Banxico narrowed. The Fed raised its policy rate to 3.75%–4.00% in September, while Banxico kept its benchmark rate at 6.50%, leaving the spread at 250 basis points, reportedly a historic low. Expectations that the Fed could keep rates higher for longer, alongside a stronger US dollar and elevated risk aversion, have also weighed on the peso, which has depreciated by more than 9% since the beginning of September.

The Mexican peso strengthened to around 18.64 per US dollar in October. The currency appreciated following strong economic activity data, with the Global Indicator of Economic Activity rising 3.5% year over year through August, its strongest performance since September 2023. The exchange rate was also supported by expectations that Mexico and the US could reach a trade agreement, following comments by President Claudia Sheinbaum and US President Donald Trump indicating that the two countries were close to a deal. Meanwhile, annual mid-month inflation rose to 3.62% in October from 3.42% in September, slightly above forecasts of 3.60%. Persistent inflationary pressures could encourage a more hawkish stance by Banxico, while markets largely expect the US Federal Reserve to hold rates at its next meeting. A wider US-Mexico interest rate differential would strengthen the peso’s yield advantage and potentially encourage carry-trade inflows.

The Mexican peso weakened to around 18.78 per US dollar in October, its weakest level since October 2025, as expectations of a narrowing US-Mexico interest rate differential, geopolitical uncertainty and stalled USMCA negotiations weighed on sentiment. Expectations of further easing by the Bank of Mexico, alongside the Federal Reserve's September rate hike, have reduced the peso's yield advantage and encouraged investors to unwind carry trades. Meanwhile, uncertainty surrounding the Middle East conflict has dampened risk appetite, while limited progress in the US-Mexico-Canada Agreement review has clouded the trade outlook. Investors are now awaiting Mexico's first-half October inflation data for further clues on the Bank of Mexico's monetary policy outlook. Headline inflation is expected to accelerate to 3.60% year-on-year from 3.42%, while biweekly inflation is forecast to rise to 0.37% from 0.33%.