MEXICO CITY, Dec 29 (Reuters) – Mexico’s peso, which is ending 2022 with one of its strongest performances in a decade, could reverse its gains in 2023 after the expected end of the Bank of Mexico’s rate hike cycle and a possible recession. A major trading partner of the United States.
Last month, the peso rebounded to pre-epidemic levels and has appreciated more than 5% against the US dollar in 2022, making it one of the best-performing global currencies alongside Brazil’s real.
But the peso’s impressive run may be coming to an end as markets expect large capital flows to Mexico in recent months, driven by the Bank of Mexico’s tight monetary policy stance, may soon begin to slow.
Banxico, as the central bank is known, is raising its benchmark interest rate in 2021.
In the coming months, Banxico is expected to end its rate-hiking cycle, and likely pull away from the US Federal Reserve, which appears to be continuing to raise interest rates. This will reduce the exchange rate differential and may cause capital outflows.
“The carry trade, the phenomenon that has benefited (the peso) this year, will probably dissipate a bit,” said CI Banco analyst James Salazar. Carry trade refers to the trading strategy of taking advantage of yield differences between Mexico and other economies.
The peso’s strength, which President Andrés Manuel López Obrador often touts as one of his government’s great achievements, has also benefited from strong remittance inflows, rising exports and foreign direct investment.
Concerns about a U.S. recession and a trade dispute have Mexico embroiled with the United States and Canada over Lopez Obrador’s energy policies, which critics call nationalistic, muddying the outlook for the peso.
“Risk perception may increase due to USMCA (trade agreement) consultations, which could lead to the imposition of measures against Mexico,” Banco Base said.
Traders at the Chicago Mercantile Exchange, seen as a driver of market sentiment, have begun betting that the peso will begin to depreciate.
Reporting by Noah Torres; Written by Anthony Esposito; Editing by Josie Kao
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