The Mexican peso almost reached 17 to the US dollar on Monday morning, but subsequently weakened to trade at 17.13 to the greenback at 12 p.m. Mexico City time.

Bloomberg data showed that the peso appreciated to 17.03 to the dollar early Monday after closing at 17.11 last Friday. The 17.03 exchange rate was the peso’s best position since late August.

The El Financiero newspaper reported that the peso strengthened on the expectation that the United States Federal Reserve will not raise interest rates at its final monetary policy meeting next month and will begin making cuts in 2024.

The Fed’s funds rate is currently set at a 5.25%-5.5% range, while the Bank of Mexico’s benchmark rate has remained at a record high 11.25% since it was raised to that level in March.

Analysts have cited the significant difference between the two rates as one factor that has contributed to the strengthening of the peso in 2023 after it started the year at about 19.5 to the greenback.

Financial consultancy Roga Capital said Monday that “the recent appreciation of the Mexican currency continues to be attributed to the optimism generated by a possible end to the cycle of interest rate increases by the Federal Reserve.”

Gabriela Siller, director of economic analysis at Mexican bank Banco Base, said on the X social media platform that the “wide” gap between interest rates in Mexico and the United States “is one of the factors” that allowed the peso to appreciate on Monday morning, but added that “the possibility that the differential” will narrow subsequently weakened the currency.

She also said that when the USD:MXN exchange rate is close to 17, investors “take currency hedges and buy dollars in advance, as greater volatility is expected in 2024.”

“This increases the demand for dollars and the exchange rate increases,” Siller added.

One key piece of data that could affect the USD:MXN exchange rate this week is the Personal Consumption Expenditures index for October, to be released in the United States on Thursday. The index is the Fed’s preferred inflation gauge.

At home, the Bank of Mexico will publish its third-quarter report on Wednesday, in which it will offer updated forecasts on economic growth and an outlook on inflation. The bank’s board will hold its final monetary policy meeting of the year on Dec. 14, but is expected to leave the key interest rate unchanged.

An initial cut to the 11.25% rate is considered likely in the first or second quarter of 2024, provided the downward trend in inflation seen throughout most of 2023 – albeit not in the first half of November – continues.

With reports from El Financiero and El Economista