Title: Mexican Peso Strengthens as Dollar Resumes Downward Trend
Subtitle: Drop in US Inflation Triggers Optimism for Less Aggressive Fed Stance
By Julio Sanchez Onofre
Mexico City, XX June 2023 – The Mexican peso gained ground against the US dollar today, resuming its downward trajectory and inching closer to its lowest level of the year. The weakening of the dollar follows the release of weak US inflation data, which could potentially lead to a less aggressive stance by the Federal Reserve (Fed).
At 07:30 AM local time, the exchange rate settled at 17.07 units per dollar, registering a 0.3% appreciation. Earlier in the session, the US currency approached its lowest level of the year at 17.04 pesos per dollar, nearing the 17.02 unit mark.
Gabriela Siller Pagaza, the Director of Economic and Financial Analysis at Banco Base, explained, “The appreciation of the peso is due to the weakening of the US dollar by 0.18% according to the weighted index, due to the publication of weak indicators from the United States.”
The US inflation rate, a closely monitored metric by the Fed, was released this morning. May’s reading revealed a 3.8% increase, significantly below the 4.6% expected by analysts and slower than the previous reading of 4.3%. In Mexico, the inflation rate stood at 4.6%, also below the expected 4.7% and the previous figure.
Jorge Gordillo Arias, the Director of Economic and Stock Market Analysis at CIBanco, explained, “This raises the stakes that the Fed could only raise the interest rate once more in the remainder of the year, contrary to what the authority has reiterated that they would like to raise it at least twice.”
Contrasting with yesterday’s solid economic data release, this lower-than-expected inflation indicator could lead traders and investors to speculate that the Fed may only raise interest rates once more between now and December 2023.
The Mexican peso is on track to conclude the first half of the year with a historic appreciation of 12.3%. Several analysts are optimistic about the national currency’s potential to strengthen further and reach levels below 17.00 units in the third quarter. This scenario is contingent on the Fed’s continued tightening of monetary policy this year and potential interest rate cuts by the Bank of Mexico (Banxico) starting in November.
“The strength that we have seen in the exchange rate does not have to be interrupted in the near future. In the following months, we will be able to continue seeing this strength supported by large inflows of capital flows to Mexico,” stated José Luis Ortega, the Director of the Debt and Multifaceted teams of BlackRock Mexico.
As the peso demonstrates resilience and positive momentum, investors and traders remain cautiously optimistic about the currency’s potential for further appreciation in the near future.