Mexico peso rally to lose steam this year on lower rate spreads: Reuters poll

Reuters

Published Jan 05, 2024 07:58AM ET

By Gabriel Burin

BUENOS AIRES (Reuters) - The rally in Mexico's peso will probably lose some steam this year as an expected shift in central bank policy to a less restrictive approach could erode the currency's attractive rate spread, a Reuters poll showed.

In 2023, the peso had its strongest performance against the dollar in more than three decades, as the central bank - known as Banxico - drove inflows by leaving its key rate at a multi-year high of 11.25% for much of the year to lower inflation.

But now the peso is seen trading at 18 per dollar at year-end, potentially losing 5.4% from around 17 on Wednesday, according to the median estimate of 25 currency strategists polled Jan. 2-4.

The expected drop is bigger than a consensus inflation forecast of 4.0% - meaning the currency will undergo some pressure from narrower rate differentials ahead, apart from the usual adjustment to rising consumer prices.

"Central banks will begin to ease in 2024 and we anticipate rate spreads between Mexico and the United States will decrease by 100-150 basis points," said Montserrat Aldave, principal economist in Finamex.

At 11.25%, Banxico's rate continues to offer a big margin over the U.S. Federal Reserve's range of 5.25%-5.50% for the cost of credit, which investors capitalize on in profitable so-called "carry trade" bets.

Mexico's central bank could weigh a rate cut in the first quarter of 2024, the bank's governor said last month. Annual inflation stood at 4.32% in November, well below a 20-year record of 8.70% in August 2022.

Meanwhile, the monetary outlook in the U.S. is less clear, even after the Fed's latest minutes showed a growing sense among policymakers inflation is under control and concerns about downside risks for the economy from restrictive policy.

Foreign exchange strategists are also on the lookout for events surrounding Mexico's June 2 presidential election. Ruling party candidate Claudia Sheinbaum has a big lead over her main rival.