Banxico risks put Mexican Peso under pressure against US Dollar - Commerzbank

A sharp depreciation in the Mexican peso reflects pressure from Banxico’s dovish policy stance and uncertainty surrounding an extension of USMCA, according to Commerzbank’s Michael Pfister. Although risks persist, the bank argues that USD/MXN may already price in much of the adverse news. It also expects the authorities eventually to signal a willingness to tighten monetary policy to contain inflation risks.

Dovish Banxico policy and USMCA uncertainty weigh on the peso

"For a long time, it seemed as though nothing could shake the Mexican peso. Neither recurring disputes with its most important trading partner, the US, nor interest rate cuts following the start of the Iraq War caused the peso any lasting damage. Until early September, it was one of the best-performing currencies in terms of liquidity. However, since then, sentiment has shifted abruptly. Instead of trading at levels below 17 in USD/MXN, the exchange rate now stands at over 18.5 - a depreciation of more than 9%."

"Such rapid depreciation usually poses major problems for the domestic economy and is likely to fuel inflation. Banxico's relaxed stance in its last decision is likely also due to USD/MXN being around 17.6 at the time, which is now one peso higher. Accordingly, the authorities are unlikely to stand by and watch indefinitely, but will at some point signal their readiness to tighten monetary policy, which would support the peso quickly."

"The outlook is more challenging when it comes to two other potential positive factors. The USMCA negotiations are currently not a top priority for the US, so it is possible that an agreement will not be reached until late 2027. A weaker US dollar would also help, but this is currently difficult to predict given the geopolitical risks. However, there is a glimmer of hope: the peso's weakness is likely to be contained because most of the risks have probably already been factored in by now."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)