Is the peso about to peak? A perspective from our CEO

Whether you love it, or are feeling the pain of it, it’s hard to ignore the impact of such a dramatic strengthening of the Mexican peso versus the US dollar.

On Friday, the peso strengthened to 16.62, an almost 8-year high. Year-to-date, the peso has strengthened nearly 15%, and is now almost 25% stronger than levels hit just 18 months ago. Yesterday’s further appreciation was partly due to cooling U.S. inflation, likely indicating that the Federal Reserve might be done with interest rate hikes.

I wrote previously about the factors that could slow down the superpeso. When might the peso begin to weaken?

There might be a clue in – of all places – Chile. Chile’s central bank lowered its interest rates by 100 basis points (1.0%) on Friday. A cut of 100 basis points is a very big one (the Federal Reserve tends to move in 25 basis point increments).

This was the first decrease in years, was larger than expected, and a unanimous decision.  The move follows a recent cut by Uruguay earlier in the month and leads analysts to believe that this is the start of Latin American countries – which were even more aggressive than the United States in increasing interest rates – to start cutting them.

Mexico increased its rates in the current economic cycle by a whopping 700 basis points (7%) to a current level of 11.25%, before recently pausing. Given that the country’s headline inflation rate has been coming in consistently lower – the most recent reported level was near 4.79% – Mexico’s central bank (Banxico) might be ready to take action to lower these rates. Stay tuned on Aug. 10, when they will hold their next meeting, as this might signal the peak of the peso’s rise against the US dollar.

Monetary policy and exchange rates are not a perfect science, and rarely easy to predict, but the lowering of interest rates in Mexico could begin to slow the peso’s appreciation.

Of course, currency moves depend on many other factors like the relative levels and trends of both interest rates and inflation of other countries, but a reduction in Mexican interest rates could be a game changer. However, the overall trends of nearshoring and economic strength in Mexico will likely keep the peso from a significant weakening.

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