Wednesday, June 19, 2024

Peso strengthens against US dollar after Bank of Mexico maintains interest rate

After weakening in April to well above 17 to the US dollar, the Mexican peso has recovered significantly and reached its strongest position so far this month on Friday morning.

Bloomberg data shows that the peso appreciated to 16.72 to the greenback on Friday morning before weakening slightly.

Shortly after 10 a.m. Mexico City time, the peso was trading at 16.77 to the dollar.

The peso has appreciated more than 2% in May after ending April at 17.14 to the dollar. It closed last Friday at 16.97.

The currency appreciated on Thursday and Friday after the Bank of Mexico (Banxico) announced that its governing board had decided to leave the central bank’s benchmark interest rate unchanged at 11%.

For an extended period, the peso has benefited from the large difference between Banxico’s key interest rate and that of the United States Federal Reserve, currently set at 5.25%-5.5%.

Janneth Quiroz, head of analysis at the Monex financial group, noted on the X social media platform that the differential between the two rates remained at 550 basis points, which she described as a “a very attractive level” for investors.

In a note, Monex said that the peso on Friday morning “extended its advance from the previous session after Banxico decided to maintain the interest rate without changes” and made an upward adjustment to its inflation outlook.

The bank is now forecasting that inflation won’t come down to its 3% target until the final quarter of 2025. It previously predicted it would reach that level in the second quarter of next year.

Monex said that the changed inflation outlook indicates that the broad differential between interest rates in Mexico and the United States will continue for longer than previously expected.

The peso has also benefited from strong incoming flows of foreign investment and remittances. Early last month, it appreciated to 16.30 to the dollar, the currency’s strongest position since August 2015.

The peso weakened later in April due to a range of factors including an increase in aversion to international risk amid ongoing conflicts including the war between Israel and Hamas.

With reports from Expansión and Radio Fórmula

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