Mexican Peso Has Good Chance to Keep Appreciating Given Big Margin between MXN and USD Inflation-Adjusted Rates

July 5, 2023

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Mexican Peso Has Good Chance to Keep Appreciating Given Big Margin between MXN and USD Inflation-Adjusted Rates

The Mexican peso represents one of very few contrarian stories of an impressive growth against the USD, even though the local economy doesn’t offer nearly as many reasons to believe MXNUSD rally is here to stay. Notwithstanding, today, on July 5, the peso breached the 17.00/USD level for the first time since 2015.

Mexico's proxy for monthly GDP grew an annualized 5.4% in April 2023, posting an acceleration from revised Q1 growth of 4.1%. Given stronger-than-expected growth so far this year, the consensus forecast for 2023 GDP growth (Q4/Q4) compiled by Banco de México rose in May to 1.1%.

Recent data have been rather mixed for the Mexican economy. While employment and retail sales advanced, industrial production was flat and exports ticked down. So the main reason the peso strengthened further against the dollar lies in the fact that inflation in this country moderated. Formal sector employment — jobs with government benefits and pensions — climbed an annualized 7.6% in May (133,000 jobs) after rising 6.5% in April (the latest available data).

The peso rally may continue for a while given the fact that there is generally positive sentiment towards the big margin between Mexico's benchmark rate, currently at 11.25%, and the U.S. Fed funds rate range of 5.00%-5.25%.