Mexico peso to pare recent gains but be kept firm by tight policy: Reuters poll

Reuters

Published Feb 07, 2023 08:11AM ET

By Gabriel Burin

BUENOS AIRES (Reuters) - Mexico's peso is set to pare its advance of recent months but will keep trading at firm levels, helped by the central bank's aggressive policy tightening to combat elevated inflation, a Reuters poll showed.

While the decline would give back part of the currency's appreciation of almost 5% during 2022, the best performance in 5 years, it would still leave the peso near 20 per U.S. dollar, around which it has oscillated since 2017.

The unit strengthened as hawkish policymakers continued to ramp up rates to a record 10.5% with a 50 basis points move in December. Banxico, as the central bank is known, has hiked a cumulative 650 basis points since April 2021.

The peso is seen at 19.83 versus the U.S. dollar in a year's time, sustaining a potential 3.5% loss from 19.16 on Monday, according to the median estimate of 19 foreign currency strategists polled Feb. 2-6.

"Given the pressures ... from a tight labor market, nearshoring and un-anchored inflation expectations, there is not much room for Banxico to risk depreciation by decoupling from the Fed", BofA analysts wrote in a report.

The peso is likely to get more support this week, with an expected 25 basis points increase in Mexico's benchmark rate to 10.75%, due to persistent pressures that exacerbated inflation in January, a separate Reuters poll showed.

This would represent a margin of 600 basis points over the upper limit of U.S. Fed rates - a good trade opportunity for risk-tolerant investors. Year to date, the peso has risen 1.6% versus the greenback.

In Brazil, the real is expected to continue on a downward trend, shedding 1.7% in 12 months to 5.24 per U.S. dollar from 5.15 on Monday, the poll showed. Since the start of 2023, the currency is up 1%.

Brazilian markets have been caught in the crossfire of a growing dispute between the orthodox leadership of the central bank and a new government focused on social issues that is openly criticizing it for maintaining high interest rates.