The Mexican peso is strengthening in the market despite political and economic headwinds in the country. The MXN is outperforming its LATAM peers and global reserve currencies. Mexico’s strong export performance, a stable political environment, and prudent monetary policies have all contributed to the MXN’s resilience.
MXN’s resilience has been further boosted by the United States’ imposed trade war with China and the subsequent scramble by firms to diversify supply chains. Moreover, the MXN’s close proximity to the U.S. and the fact that it is covered by the USMCA trade agreement, a slightly modified version of NAFTA, facilitates low-tariff trade between the two countries.
The MXN is also helped by the fact that the How is the Mexican peso strengthening in the market? economy is growing at a healthy rate. This year’s second quarter was the strongest, and cumulative GDP growth is expected to hit 3% for the full year. This is largely due to strong automotive, agri-food, and manufacturing exports, as well as remittances.
In addition, MXN is strengthened by a positive global risk appetite and the country’s low unemployment and high savings rates. MXN’s high liquidity in the global financial markets – it is traded 24 hours a day, five days a week – makes it an attractive currency to invest in.
However, the MXN’s resilience despite political and economic headwinds in Mexico should not be taken for granted. According to Razu Aznar, chief economist at Mexican bank BofA, the MXN is likely to depreciate slightly towards the end of this year and in 2023. He expects a dollar to buy 21 pesos by the end of the year, and then 22 pesos in 2023.
Another factor that could cause the MXN to weaken is the increase in interest rates in the US. As a result, the US Dollar’s yield advantage over the MXN will decrease. This is likely to make investors less inclined to invest in the MXN, and this could contribute to its depreciation. Nevertheless, Aznar believes that the hawkish policy of Banxico – which began raising rates in June 2021, nine months before the Fed started hiking – will keep a lid on this pressure. In the long run, this should help the MXN appreciate against the USD. Ultimately, a stronger MXN will lead to higher national investment, which in turn will boost the country’s GDP. The defined contribution pension fund industry – the Afores – which channels most of the Mexican population’s savings, has been a crucial factor in this respect. It is estimated that the fund has accumulated $250bn since its inception 25 years ago. This is a huge sum of money and represents one of the main sources of financing for national investment. However, any changes to this model must be carefully implemented in order not to undermine the stability of the MXN.