Peso strength expected to decline in 2024, what are the reasons? • Economy and Finance • Forbes Mexico

The Mexican peso’s rally will lose some steam in 2024 as an expected shift in the Banco’s monetary policy toward a less restrictive approach could erode the currency’s attractive rate differential, according to a Reuters survey.

In 2023, the peso posted its strongest performance against the dollar in more than three decades as the central bank boosted capital inflows, leaving inflation at a multi-year high of 11.25% for most of the year before easing.

But the peso is now expected to trade at 18 to the dollar by the end of the year, a loss of 5.4% from around 17 on Wednesday, according to the average estimate in a Jan. 2-4 survey of 25 currency strategists.

The expected decline is larger than the consensus inflation forecast of 4%, which means the peso will come under some pressure from a tighter rate differential in the future, in addition to the usual adjustment to rising consumer prices.

Read: Analysts slightly revise forecast for Mexican economy in 2024

“Central banks will start making their rates more flexible in 2024 and we expect the rate differential between Mexico and the United States to narrow to between 100 and 150 basis points,” said Montserrat Aldway, chief economist at Finamax.

With a rate of 11.25%, the Banxico instrument continues to offer a large margin over the Federal Reserve rate, which is between 5.25% and 5.50%, which investors capitalize on in profitable bets known as “carry trades.”

Banco may consider cutting its reference rate in the first quarter of 2024, the entity’s governor, Victoria Rodriguez, said last month.

Inflation stood at 4.32% annualized in November, well below the last 20-year record of 8.70% recorded in August 2022.

Meanwhile, the monetary outlook in the United States is less clear, even after recent Federal Reserve minutes showed a growing sense among policymakers that inflation is under control and concerns about downside risks to the economy posed by restrictive policy.

He denies that the election will have a significant impact on the peso

Foreign exchange strategists are also wary of events surrounding Mexico’s June 2 presidential election. The ruling party’s candidate, Claudia Schönbaum, has a big advantage over her main rival, Xóchitl Gálvez.

“We do not expect any significant impact on the peso, as volatility in the previous (electoral) episode peaked just a month before (the vote) and then dissipated,” said Finamax’s Eldway.

Lee: The Mexican economy is strong and responding to the Treasury, with no signs of weakness

With information from Reuters

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