The year 2024 presents many uncertainties in the path of the Mexican peso against the dollar. Photo: Getty Image. (Max Zolotukhin via Getty Images)
The Mexican peso closed the year 2023 with a record appreciation against the dollar of almost 13% (under 17 units), making it one of the best performing emerging currencies in the world, and which caused the currency to begin to be known as ‘superweight’. However, Everything indicates that 2024 will not be such a quiet year for the currency.
At the moment the peso is already moving at the level of 17.2 units per greenback, which has not been seen since the first half of December 2022, and is accumulating a weekly depreciation of 1.4% or 24 cents. If it holds its current position for the rest of the day, the superweight will post its worst-performing week since early last October, when it depreciated 4.4% in wholesale trades reported by Bloomberg.
The keys that will mark the whole of 2014 for the Mexican peso
There are two key factors explaining the depreciation of the peso and the rise of the dollar, and both will be constantly present in investors’ minds throughout 2024, so it will be important to keep an eye on them: the electoral landscape in the United States with a possible return of Donald Trump to the White House and what is possible rate cuts of the Federal Reserve (Fed).
“The effect of the possibility of a Trump presidency depreciates the exchange rate because Trump has said that, if he wins (the next US election), he will impose a series of tariffs on several countries around the world, including those that have a free trade agreement ”, explained the chief economist of BBVA Mexico, Carlos Serrano.
In fact, after former President Trump (2017-2021) won the primary election in Iowa, increasing the possibility that he would be nominated as the presidential candidate by the Republican Party, the weight weakened.
As for the second factor, possible rate cuts in the United States, the more rapid and strong the rate cuts, the more upward momentum the peso will receive. Conversely, if the US central bank cuts rates less than expected, all indications are that the dollar would strengthen, putting downward pressure on the Mexican currency.
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All eyes on the Fed
For now, while waiting for those decisions to arrive (or not), investors are playing with expectations. Positive economic indicators in the United States dampen hopes of rate cuts, pushing the dollar higher. And this is exactly what is happening right now.
This Wednesday the markets had to analyze a report on retail sales which suggested that consumers are still spending and therefore inflation will not decline as quickly. Rate cut bets have faded and virtually all Latin American currencies have been punished.
In any case, we must not forget that the key data and the one that investors will look at most closely will be the inflation in the United States, which is also cooling expectations for rate cuts. A week ago, investors had to digest that December inflation rose more than expected, raising doubts about the Fed’s rate cuts, and Wall Street collapsed.
All this makes it difficult to predict what will happen to the superpeso during this new year 2024. Although there are some analysts who dare to launch their predictions, such as the chief economist of Grupo Financiero Banorte, Alejandro Padilla, who believes that the peso-dollar exchange rate can be maintained “relatively stable at the levels we have observed, simply because there are flows, because we have an attractive interest rate.”
And he anticipated that “in the second half of 2024 we may see an adjustment, but a fairly moderate one, also considering the volatility linked to the elections in the United States on 5 November”.
Article prepared with partial information from EFE and Reuters.
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2024-01-19 16:53:47
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