Mexico’s peso is currently facing a challenging landscape, with a mixture of positive and negative factors influencing its performance in the foreign exchange market. Despite a relatively firm economy, the currency has experienced a minor 1% drop year-to-date. This depreciation is expected to continue in the medium-term, with a forecasted additional 2.6% decline in the next 12 months. These factors include the delayed start of monetary policy easing in the United States and higher global volatility due to tensions in the Middle East.
According to a Reuters poll of foreign exchange experts, the Mexican peso is underperforming compared to other Latin American currencies, as speculators cut “carry trade” positions. Despite this, analysts remain cautiously optimistic about Mexico’s economic fundamentals. Erick Martinez, a Latam FX and rates strategist at Barclays, believes that Mexico stands to benefit the most among emerging markets from U.S. exceptionalism. He points to growth tailwinds from friend-shoring, close ties to the United States in terms of labor markets, and monetary policy support as key factors bolstering the peso in the near-term.
The upcoming presidential election in Mexico adds a layer of uncertainty to the peso’s outlook. While the country’s central bank has already lowered its benchmark rate, there are doubts about the future trajectory of monetary policy. The current frontrunner for the presidency, Claudia Sheinbaum, has promised austerity measures but faces skepticism from economists about her ability to address fiscal challenges decisively. The outcome of the June election, as well as the U.S. election in November, remains a source of significant uncertainty for the Mexican peso.
In contrast to Mexico, Brazil’s real is expected to strengthen in the next 12 months, gaining 3.8% against the dollar. The real has faced a 6.5% decline so far in 2024, with investors focusing on a deeper fiscal deterioration compared to Mexico. This highlights the diverging paths of these two major Latin American economies and the impact of political and economic factors on their respective currencies.
Overall, the future of Mexico’s peso hangs in the balance between economic resilience and political uncertainties. While the currency is likely to face further depreciation in the short to medium-term, the long-term outlook will be shaped by key economic indicators and political developments. Investors and analysts will closely monitor the upcoming elections and policy decisions to gauge the peso’s trajectory in the global foreign exchange market.