Mexican Peso Rebounds on Weak USD

The Mexican peso weakened to 20.7 per U.S. dollar, after a brief recovery from its March 2022 low of 20.85 on December 31, pressured by Banxico's dovish tone, easing inflation, and a stronger U.S. dollar.

Banxico's latest minutes hinted at larger rate cuts, aligning with inflation falling to a 46-month low of 4.21% annually in December, fueling expectations of a 50-basis-point cut in February.

Simultaneously, robust U.S. jobs data reinforced expectations of a cautious Fed, with minimal rate cuts projected for 2025, supporting the dollar.

Adding to the peso's woes, President-elect Donald Trump proposed declaring a national economic emergency to impose sweeping import tariffs, heightening concerns over Mexico's trade outlook.

The Mexican peso weakened beyond 20.44 per U.S. dollar, after a brief recovery from its March 2022 low of 20.85 on December 31, as investors processed Banxico's latest minutes, inflation data, and concerns over U.S. tariffs.

Banxico held rates steady, stressing inflationary pressures and the need for caution due to global and domestic uncertainties.

However, December's inflation data, showing a 0.38% monthly rise and an annual rate of 4.21%, the lowest in 46 months, strengthened expectations for a 50-basis-point rate cut at Banxico’s February meeting.

Peso losses were further exacerbated by global dollar strength, driven by expectations of a cautious Fed, with no rate cuts expected in January and a mere 25-basis-point cut anticipated for the first half of 2025.

Moreover, fears mounted as President-elect Donald Trump proposed declaring a national economic emergency to justify sweeping import tariffs.

The Mexican peso weakened past 20.14 per US dollar, nearing the monthly low of 20.37 seen on December 18th, as investors processed the latest inflation data and assessed the Bank of Mexico’s monetary policy outlook.

While Mexico’s headline inflation moderated to 4.44% year-on-year in the first half of December, it exceeded expectations and remained above the central bank's 3% target.

Furthermore, core inflation unexpectedly rose to 3.62%, halting a six-week decline and indicating persistent price pressures within the economy.

Additionally, Banxico recently lowered its benchmark rate by 25 basis points to 10%, in line with market expectations.

Although this rate cut aligns with forecasts of cooling inflation, expected to reach 4.6% by year-end, the central bank's projection that inflation will not return to the 3% target until mid-2026 has introduced additional uncertainty, weighing on investor confidence.

The Mexican peso strengthened past 20.2 per US dollar, recovering from the monthly low of 20.37 seen on December 18, as the US dollar weakened following softer-than-expected Core PCE data.

This prompted hopes of disinflation, bolstering expectations for additional rate cuts by the Federal Reserve, further supported by positive US GDP and jobless claims data.

Meanwhile, the Bank of Mexico cut interest rates by 25 basis points to 10%, aligning with investor expectations.

This rate reduction comes amid cooling inflation in Mexico, with Banxico projecting further easing in the coming year amid forecasts of inflation cooling to 4.6% by year-end, though it does not anticipate reaching its 3% target until mid-2026.

The Mexican peso remained above 20.3 per US dollar, near the monthly low of 20.37 seen on December 18, after the Bank of Mexico cut rates to 10% and signaled further easing, potentially with larger cuts, depending on the pace of disinflation and economic conditions.

Banxico cited a decline in headline inflation to 4.55% in November, core inflation easing to 3.58%, and ongoing economic weakness despite Q3's rebound, with growth expected to soften and employment decelerating.

Meanwhile, US dollar strength pressured the peso, driven by the Federal Reserve's 25 basis point rate cut and its unexpectedly hawkish guidance for 2025, which now anticipates only two rate cuts instead of the four previously projected.

The Mexican peso strengthened past 20.19 per US dollar, recovering from a March 2022 low of 20.64 on November 26, as hawkish signals from the Bank of Mexico compounded with dovish expectations for the US Fed.

US inflation data for November, which showed a slight increase in headline inflation and steady core CPI, raised expectations that the Federal Reserve will reduce rates in its upcoming December meeting.

Domestically, Mexico's inflation eased, with November's headline inflation falling to 4.55% year-over-year, its lowest in eight months, and core inflation easing to 3.58%, the softest reading since April 2020.

Meanwhile, Mexico’s unemployment rate dropped to 2.5% in October, its lowest since March and well below the forecasted 2.9%.

This positive economic data fueled expectations for continued flexibility in Banxico’s rate-cutting cycle, aligning with Governor Irene Espinosa’s cautious outlook ahead of the December 19 meeting.