The Mexican peso regained some ground Friday morning after recording losses against the US dollar during four consecutive days between Monday and Thursday.
One greenback was trading at 17.05 pesos at 11 a.m. Mexico City time after closing at 17.28 on Thursday. The U.S. dollar had strengthened slightly to 17.08 by 1 p.m.
The peso depreciated almost 4% against the US dollar during the first four days of the workweek after reaching 16.62 to the greenback last Friday, the currency’s strongest position since late 2015.
At one point on Thursday, the peso had weakened 1.8% from its closing position on Wednesday, falling to 17.33 to the dollar “as investors flocked to the greenback and sent long-term U.S. yields higher,” according to a report by the Bloomberg news agency.
There was increased appetite for the greenback even though Fitch Ratings on Tuesday downgraded the United States’ long-term foreign-currency issuer default rating to AA+ from the top-tier AAA. Kevin Gordon, a senior investment strategist with Charles Schwab Corporation, said that investors had accepted the “paradox” that U.S. government bonds were a safe haven, even after Fitch’s downgrade.
Positive manufacturing and construction data out of the United States and growing aversion to risk benefited the greenback this week. An estimate from the Federal Reserve Bank of Atlanta that the U.S. will record real GDP growth of 3.9% in the third quarter and better than expected data showing that private U.S. employers added 324,000 jobs in July were also cited as factors that buoyed the dollar.
“The dollar is likely rising more in response to the economic data that continues to be stronger and therefore the market thinks that the Fed will continue to raise rates,” Michael Arone, chief investment strategist for State Street Global Advisors in Boston, said Wednesday.
“… The dollar is getting a rally, in conjunction with a little bit of flight to safety,” he said.
However, the dollar weakened on Friday after a different set of employment data showed slower than expected U.S. non-farm jobs growth in July. Data derived from the U.S. Department of Labor’s survey of households showed that non-farm payrolls increased by 187,000 positions last month, 13,000 fewer than the number predicted by economists surveyed by Reuters.
Marc Chandler, chief market strategist at Bannockburn Global Forex in New York, said that the Job data from the U.S. Department of Labor brought an end to this week’s surge in Treasury yields and halted the dollar’s recent ascent.
“… The dollar’s upside correction is almost over,” said Chandler, who was quoted in a Reuters report.
The weaker than expected job data makes it less likely that the U.S. Federal Reserve will lift its funds rate, which rose by 25 basis points to a range of 5.25-5.5% last week. A decrease in annual inflation to 3% in the United States in June also increases the probability that the interest rate hike announced by the Fed last week was the final one in a tightening cycle that began in early 2022.
Analysts cite the Bank of Mexico’s high benchmark interest rate – currently 11.25% – and the significant difference between that rate and that of the Fed as one factor in the current strength of the peso. Strong incoming flows of foreign capital and remittances are among the other factors cited.
The governing board of the Bank of Mexico will convene next Thursday to discuss monetary policy, but has already indicated that it expects to maintain the current 11.25% interest rate for an extended period, even as inflation slows.
The peso has appreciated significantly against the US dollar in 2023 after trading at about 19.5 to the greenback at the start of January.
Bloomberg reported that some strategists, including those at Goldman Sachs, have warned that Mexico’s currency is overvalued “after this year’s run-up left it trading near an eight-year high.”
According to the same Bloomberg report, Shamaila Khan, head of emerging markets and Asia Pacific at UBS Asset Management Americas Inc, said that the peso’s rally in 2023 led many investors to bet on additional peso strength, which increased the currency’s losses between Monday and Thursday “as many ran for the door” as appetite for risk waned.