Is the peso’s long-running party over, or was last month’s peso depreciation just a brief break from its spectacular rally against the US dollar in 2023?
The Mexican peso fell 1.86% against the US dollar in August, ending the month at 17.05 pesos, according to Banco de Mexico. It is the first time this year that the peso has fallen further at the end of the month than at the beginning of the month.
The peso opened at 16.74 pesos to the dollar in August, and the peso position fell 31 centavos during the month.
A drop in value roughly equal to the value of two rarely used Mexican coins doesn’t seem like a big deal, but the break in the peso’s long winning streak is significant if it’s a sign of what’s to come. there is a possibility.
El Economista newspaper reported in August that factors affecting the peso include: US sovereign credit rating downgradedexpectations that the US Federal Reserve could raise rates (the next monetary policy meeting is scheduled for Sept. Determining currency volatility to terminate the annual hedging program.
The peso fell 29.6 centavos (1.77%) against the dollar on Thursday after the announcement by Banxico. announced the decision of the Exchange Commission.
Citing a return to “adequate levels of liquidity and depth” in domestic foreign exchange markets and “low volatility” in international markets, Bansico said, “Credit institutions and other economic We have conditions that directly cover the risk of in the exchange market. “
“Therefore, the Foreign Exchange Commission has decided to direct the Banco de Mexico to phase out the amount of its current foreign exchange hedging programme, with the aim of always maintaining the orderly functioning of the foreign exchange market.” Bansico said.
Starting this month, the central bank announced that it will “renew the maturity of the foreign exchange hedge only once, at 50% of the current amount.”
Bloomberg News reported that the cutback in the hedging program is sending a signal to traders that it has “brought the stock price up…”. [peso] world’s top performer [in 2023] I may have gone too far. “
The peso has risen more than 12% against the dollar since the beginning of the year, when the US dollar-Mexican peso exchange rate was around 19.5, even though the exchange commission’s decision caused the peso to weaken on Thursday.
Benito Berber, chief Latin America economist at French bank Natixis, said Bansico’s decision to scale back its hedging program was “a clear sign that the peso may be too high.”
Felipe Hernández, Mexico economist at Bloomberg Economics, said a reduction in the hedging program “makes a lot of sense given the strong peso this year and Mexico’s record-high interest rates, currently set at 11.25%. It’s working,” he said.
Clyde Wardle, forex strategist at HSBC Securities USA, said Mexico is “essentially using the strength of MXN as an opportunity to exit these outstanding forward positions.”
The peso had its worst day since March on Thursday, but will it continue to fall against the dollar?
The currency fell again on Friday morning, trading around ¥17.10 to the dollar as of 11 a.m. Mexico City time, according to Gabriela Siler, director of economic analysis at Mexican bank Banco Base. No further decline is expected.
“The market did not anticipate this decision by the Trade Commission, which caused an overreaction. . [strengthening] But we are less likely to hit new lows this year,” she said.
The peso’s strongest position in 2023, and in almost eight years, was 16.62 pesos to the dollar in late July.
If U.S. interest rates are raised to a range of 5-25%-5.5%, the peso will fall given that the large differential between that rate and Mexican rates is one of the factors supporting the peso this year. there is a possibility.
But Atlanta Fed President Rafael Bostic said Thursday that interest rates are already high enough that U.S. inflation will drop to 2% in a “reasonable” period.
Reuters reported “Traders bet on Friday that the US Federal Reserve is likely to complete the rate hike given the government report showed rising unemployment.” [in the U.S.] Wage growth slowed last month. “
Inflation in Mexico is trending downward (4.67% in early August), but Bansico does not plan to cut rates before December, which could support the peso in coming months with a record 11.25% rate. It means that there is a gender. .
Strong foreign capital inflows and remittances are among other factors that have benefited the peso this year.
So what will the USD-MXN exchange rate be at the end of 2023?
Analysts surveyed recently by Citiba Namex agreed that the peso would trade at 17.85 pesos to the dollar by the end of the year, a significant drop from current levels, but nevertheless, January’s Significantly improved from the standard.
Of course, currency forecasting is not an exact science, and a variety of factors and events, including the unexpected, can affect the “super peso”, which falls slightly over the next few months.
with a report from Elle Economista, El Financiero and bloomberg
