The interest rate differential continues to favor Mexico.
US Dollar / Mexican Peso
The US dollar has been soft against most currencies during December, and of course, the Mexican peso will have been no different as the interest rate differential continues to favor Mexico. We've been in a downtrend for several months now, and I think at this point in time, we continue to see more of a fade of the rally-type market.
The market is hovering around the 18 Mexican peso level at the moment, but really, at this point in time, it looks like we could find our way toward the 17.50 level. This is an area that's been important multiple times in the past, and we are almost to the point where we have to think about a round trip from the absolute bottom in the early part of summer 2024.
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Two Main Factors
I think ultimately this will come down to two things, both of which will be United States-related. The first one, of course, is central bank policy, and it looks like the Federal Reserve is going to end up cutting a couple of times, and that will just widen the interest rate differential between these currencies in favor of Mexico. But at the same time, this is a little bit of a different market in the sense that the peso does better as the US economy does better, mainly due to the fact that Mexico is by far the largest exporter to the United States.
So, as we get economic numbers out of the United States that are actually stronger than anticipated, it makes a certain amount of sense if you think about exports heading into the United States, that Mexico is one of the big beneficiaries. On the other hand, if we do see the US economy tumble, which is not my base case scenario at the moment, then the Mexican peso suffers as traders start to look towards US Treasuries for safety. And of course, there will be fewer exports into America. All things being equal, though, I think this remains the same scenario where you are looking for signs of exhaustion.
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