Peso bounces back, gaining 3% on US dollar in a week

What a difference a week can make.

One US dollar was worth 17.6 pesos at the close of trading last Thursday and there was talk that the USD:MXN rate could go to 18 in the short term.

But at 1 p.m. Mexico City time this Thursday, one greenback was trading at 17.08 pesos, a depreciation of 3% in the space of a week.

The peso’s improved position comes after gains against the greenback on four consecutive days this week. According to a Reuters report, the peso has rallied on expectations that the United States Federal Reserve’s monetary policy tightening cycle has come to an end.

The Fed is due to make its next interest rate decision next week, and will have to consider fresh data that shows that annual inflation in the United States rose to 3.7% in August from 3.2% in July.

Analysts cite the Bank of Mexico’s high benchmark interest rate – currently 11.25% – and the significant difference between that rate and that of the Fed (5.25%-5.5%) as one factor that has benefited the peso this year.

Strong incoming flows of foreign capital and remittances are among the other factors cited. The peso reached its strongest level of 2023 – and in almost eight years – in late July when it was trading at 16.62 to the dollar.

Meanwhile, Fitch Ratings on Wednesday increased its forecast for 2023 economic growth in Mexico to 3.1% from 2.5% in June. The rating agency anticipates that Mexico’s GDP will expand 1.8% in 2024 and 2.3% in 2025.

As for inflation in Mexico, the annual headline rate has declined every month since February, reaching 4.64% in August, its lowest level since early 2021.

With reports from Reuters and Aristegui Noticias