Friday, December 1, 2023

Peso weakens then rallies after central bank interest rate decision

The Mexican peso rallied on Friday after depreciating to close to 18 to the US dollar in early morning trading.

Bloomberg data shows that the peso fell to a low of 17.92 to the greenback early Friday, but it had improved to 17.64 to the dollar by 3:30 p.m. Mexico City time.

The peso’s recovery to that level came after the currency closed at 17.81 to the dollar on Thursday, a depreciation of 1.4% compared to its position 24 hours earlier.

The slide came after the Bank of México (Banxico) announced that its board had decided to maintain its key interest rate at a record high of 11.25%.

The newspaper El Economista reported that the peso depreciated on Thursday due to a “less restrictive tone” in the central bank’s monetary policy statement, suggesting that rates will remain at the current level for less time than previously anticipated.

Banxico said in previous statements that its board believed that rates would have to be maintained at 11.25% for “an extended period” in order to achieve “an orderly and sustained convergence of headline inflation to the 3% target.”

The Bank of Mexico building in Mexico City
Banxico said the current record-high interest rates will continue for “some time” to meet its goals to limit inflation. (Shutterstock)

On Thursday, the bank — after acknowledging that inflation is decreasing — adjusted its language slightly, saying that “the reference rate must be maintained at its current level for some time.”

Hence, a first cut to the record high 11.25% rate could come sooner than previously expected.

El Economista said that the weakening of the peso on Thursday was the largest of three depreciations of the currency following Bank of Mexico monetary policy announcements this year.

Gabriela Siller, director of economic analysis at Banco Base, said that remarks on Thursday from the chair of the United States Federal Reserve, Jerome Powell, also had an impact on the peso.

A stock photo of pesos and dollar bills and coins.
The peso fell to almost 18 to a dollar Friday morning before rebounding. (Shutterstock)

Powell said that the Fed’s Federal Open Market Committee “is not confident” that it has achieved “a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2% over time.”

His remarks raised the prospect that the Fed could increase rates from their current 5.25%-5.5% level.

The Mexican peso has benefited this year from the significant difference between interest rates here and those north of the border. An increase in the U.S. would reduce the differential between the two rates and likely cause the peso to depreciate.

So why did the peso rebound on Friday after sinking to close to 18?

According to Janneth Quiroz, director of analysis at the Monex financial group, the peso benefited from a general weakening of the greenback on Friday morning.

The DXY index, which measures the value of the dollar against a basket of foreign currencies, remained below its closing position on Thursday at 3:30 p.m. Friday.

Despite strengthening on Friday, the peso was on track to record a slight depreciation this week after closing at 17.46 to the dollar last Friday.

Last week was a good one for the Mexican currency, prompting President López Obrador to declare last Friday that the “super peso” was back.

With reports from El Economista


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