The Mexican peso’s rally is expected to slow down in 2024 as the country’s central bank, Banxico, shifts towards a less restrictive monetary policy, according to a Reuters survey. In 2023, the peso had its best performance against the dollar in over three decades, boosted by capital inflows as Banxico kept its key rate at a multi-year high of 11.25%. However, the expected shift in policy could erode the currency’s attractive rate differential, leading to a potential 5.4% drop against the dollar by the end of the year.
Montserrat Aldave, chief economist at Finamex, stated that rate differentials between Mexico and the United States could decrease by 100 to 150 basis points, leading to a potentially less favorable environment for investors engaging in profitable bets known as “carry trade.”
Despite the upcoming presidential elections in June, foreign exchange strategists do not expect a significant impact on the peso. Previous electoral episodes have shown that volatility only increases a month before the vote and then dissipates.
The future of the monetary outlook in the United States remains unclear, even after recent Federal Reserve minutes indicated a growing sense among policymakers that inflation is under control and concerns about downside risks for the economy derived from a restrictive policy.
Inflation in Mexico stood at 4.32% in November, well below the record of 8.70% in August 2022. Banxico’s governor, Victoria Rodríguez, hinted at a potential cut to the reference rate in the first quarter of 2024.
The overall outlook for the Mexican peso in 2024 remains uncertain amid changing monetary policies and election developments. According to analysts, the peso will likely lose momentum and come under pressure as rate differentials decrease and the inflation rate adjusts.