Mexican Peso Continues to Climb, but Analysts Say Rally’s Days Are Numbered

The Mexican currency has appreciated 9.5% against the US dollar since the start of this year, but it’s not all good news, according to analysts

One of the elements that has favored the appreciation of the Mexican pesos is the wide interest rate differential between Mexico and the US.
May 19, 2023 | 10:10 AM

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Mexico City — The Mexican peso’s rally so far in 2023 has made the currency one of the best performers among emerging markets, accumulating a little over 9.5% against the US dollar.

But while the appreciation of the Mexican peso favors imports, Mexican families receiving dollars from the US via remittances, an important source of income for many families in the country, now get fewer pesos for their bucks.

And the situation affects other dollar-linked sectors such as tourism.

For example, at the beginning of the year, when the peso was at 19.40 to the US dollar, a visitor exchanging $50 would receive 970 pesos, whereas they would currently get 885 pesos.

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When will the peso start to depreciate?

The outlook has changed since the beginning of the year, and analysts have updated their estimates for the end of 2023, with forecasts seeing the peso beginning to depreciate around the fourth quarter.

At this point, projecting the next levels of the Mexican peso is complicated. The currency has extended its rally for longer than estimated and, in doing so, has already reached analysts’ equilibrium value.

“The strengthening of the peso has already exhausted its strength, and unless a very important unforeseen event does not happen in favor of the Mexican currency, we will have a strengthening of the dollar in the coming weeks and months,” said Swissquote Bank analyst Rodrigo Aguila.

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Bloomberg analysts’ consensus forecasts estimate that the Mexican currency will trade at 18.66 per US dollar toward the end of the year, equivalent to a 5.05% depreciation from the May 18 level of 17.76 per dollar.

On the other hand, the consensus of analysts in a Citibanamex survey estimates that the Mexican peso will settle at $19.20 per dollar, a level that represents a potential depreciation of 8.10% from the May 18 quotation.

“Our estimates consider that toward the second half of the year the peso would begin to depreciate a little,” said the deputy director of economic and financial analysis at CiBanco, James Salazar.

One of the elements that has favored the appreciation of the local currency is the wide differential between the Mexican and US interest rate. The CiBanco strategist explained that they estimate that US inflation will fall faster compared to Mexico.

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Under this scenario, “it is very likely that the real interest rate in the U.S. will become positive in the following months, generating a realignment of portfolios in favor of the dollar, and if combined with fears of the risk of economic recession, this will work against the Mexican currency”.

The brokerage firm estimates that the Mexican peso will reach 18.70 by the end of the year, which it says is due to the fact that the real interest rate in the US will become positive and will make peso-denominated assets less attractive.

Rankia Latin America’s chief economist Humberto Calzada believes that when the Bank of Mexico moves to a more lax monetary policy after the hiking cycle, the peso will be more attractive to investors.

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Aguila explains that the Mexican peso is in the best situation at a technical level for buying, as it is just bouncing off the lower zone of the bearish channel.

“This coincides precisely with the 50% Fibonacci retracement zone, giving us an excellent opportunity to go for the upper part of the channel, even exceeding 22 per dollar,” he told Bloomberg Línea.

Mexican elections in 2024

A second element that will favor currency depreciation is the Mexican elections in 2024.

“The federal elections that will take place in 2024 in Mexico could cause a gradual depreciation toward the end of the year and into 2024,″ BBVA analysts wrote in a note.

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However, one of the reasons that will prevent the Mexican peso from depreciating further are the nearshoring investment expectations that will keep the Mexican peso at levels below 19 per dollar, they said. BBVA strategists raised their estimates on the Mexican peso to 18.50 from a previous estimate of 19.20 to the dollar.

Despite the fact that fewer pesos are received in exchange for US dollars at present, Rankia Latin America’s chief economist Calzada explained that this would not affect the Mexican economy, as it is compensated by the benefits it generates for imports and for companies with debt in US dollars.