Title: Mexican Peso Remains Stable Against American Dollar at the End of June
Subtitle: Local Currency Shows Strong Progress for the First Semester
The Mexican peso concluded the month of June without major changes against the American dollar, in line with yesterday’s official closing rate. With the focus of traders on the upcoming interest rate decisions by the Federal Reserve (Fed), the local currency has shown significant progress throughout the first semester.
Closing at a rate of 17.1156 units per dollar, the peso experienced a marginal 0.01% appreciation compared to the previous day’s official record of 17.1162 units, according to the data provided by the Bank of Mexico (Banxico).
The peso has displayed a highly positive performance since the beginning of the year. It has gained strength compared to the exchange rate of 19.5089 units per dollar in December, resulting in an overall improvement of 2 pesos and 39 cents. This translates to a solid appreciation of 12.27% for the Mexican currency.
Multiple experts attribute the peso’s advance in the first semester to several factors, including the significant interest rate differential between Banxico and the Fed. Currently, Mexico’s interest rates stand at 11.25%, while the Fed’s rates are considerably lower at 5.25%.
The strategy of exploiting this interest rate differential, known as carry trade, has allowed traders to sell the dollar with its relatively low interest rate and invest in currencies with higher interest rates, such as the peso.
The impressive performance of the peso is also attributed to the signs of a slowdown in local inflation and the resilience of the Mexican economy. As a result, the exchange rate reached a minimum of 17.0241 pesos per dollar this month, a level not seen since December 2015. However, caution remains in the market due to the recent pause in Banxico’s rate hike cycle.
While Banxico has kept interest rates unchanged for two consecutive decisions, the market anticipates that the Fed will resume rate hikes in July, with a 25 basis point increase. According to CME Group’s Fed Watch tool, there is an 86.8% probability of this hike taking place.
Jerome Powell, the president of the US central bank, and other officials have stated that interest rates will rise further based on economic data. Recent economic indicators from the United States have shown strength, supporting the possibility of further rate hikes.
In contrast, the Dollar Index (DXY) of the Intercontinental Exchange, which measures the greenback against a basket of six major currencies, experienced a 0.42% drop to 102.90 units at the close. This decline followed the release of the Fed’s favorite inflation gauge, the personal consumption expenditures (PCE) price index, which advanced 0.1% in May, compared to 0.4% in April. This unexpected easing of inflationary pressures tempered expectations for further rate hikes.
For the month of June, the dollar index accumulated a loss of approximately 1.35%, with the market projecting only one rate hike. On the other hand, the peso had its strongest month since January, advancing 57.30 cents or 3.23% from last month’s rate of 17.6886 pesos per dollar.
Analysts from Monex emphasized that while June seems positive for the markets, the role of central banks will carry more weight in the coming months. Therefore, economic data for the next month will be crucial in determining future market trends.
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