The Mexican peso closed this Tuesday at a new low not seen since September 2017 and remains the most appreciated currency against the dollar so far in 2023, strengthened by an optimistic financial environment and the expectation that the Federal Reserve (Fed ) has already finished raising its reference rate.
The interbank dollar ended this Tuesday at 17.7586 pesos, after posting an intraday gain of 0.25% or 4.42 cents, according to data from the Bank of Mexico (Banxico).
The currency was supported in the session by inflation data for April that showed a third consecutive monthly contraction.
It is the lowest closing of the dollar since September 22, 2017, when the parity ended at 17.7365 units.
With Tuesday’s exchange rate tied eight sessions below 18 units, a period in which the Mexican currency has appreciated 1.60% or 28.79 cents
Mario Correa, independent economic advisor, explained that the exchange rate is reacting to an optimistic international financial environment, due to the strength of economic data in the United States.
“The last stretch of appreciation coincides with the rise in the main equity markets,” he said.
In last Friday’s session alone, the peso appreciated 0.71% or 12.80 cents, after better-than-expected US employment data was released that same day, alleviating some fears of a recession.
Gabriela Siller, director of Analysis at Banco Base, said that the strength of the peso in recent days also occurs within the framework of a dollar that has weakened due to the expectation that the United States Fed has already finished its upward cycle to the interest rate.
The Fed raised its interest rate by 25 basis points on Wednesday of last week, to bring it to a range of 5.00-5.25%, and gave signs that this would have been the last increase in the upward cycle that began 14 months ago.
The dollar index, which measures the strength of the greenback against a basket of six strong reference currencies, loses 1.82% in the year, trading on Tuesday at 101.65 units.
The peso-dollar parity touched a minimum of 17.7361 units on Monday, therefore, according to OctaFX analysts, the next support level is 17.50 pesos per dollar.
“A break (of 17.50) would expose the low registered in July 2017, at 17.45, before falling to 17.00 pesos per dollar,” OctaFX analysts say in a note.
Even in the Chicago Futures Market, speculators continue to bet that the peso will continue to appreciate, adding eight weeks in favour.
In the week from April 26 to May 2, the number of peso contracts on the CME added 57,710 units, an advance of 6.62 percent.
Reaction to Banxico
Analysts assured that a possible pause by Banxico in the increase in its interest rate next week could weaken the peso, since the rate differential with the United States would be reduced, one of the main factors that have propped up the peso.
The governor of the Bank of Mexico, Victoria Rodríguez Ceja, affirmed two weeks ago that it would not be a surprise to see a pause in the rate increase on May 18.
If the pause materializes, the interest rate in Mexico would remain at 11.25%, with which the differential with the United States would go from 625 to 600 base points (bp).
“If Banxico decides not to increase its funding rate any further, the peso could depreciate between 20 and 40 cents, but this would not change the strong trend of the peso,” said Jorge Gordillo, director of Analysis at CI Banco.
Janneth Quiroz, deputy director of Analysis at Monex Casa de Bolsa, opined that there would be no such depreciation in the exchange rate, since said possibility has already been discounted by the market.
“We are going to return to a 600 bp differential between the rates of Mexico and the United States, which was the one that was maintained for almost the entire upward cycle. Although it widened to 625bp earlier in the year, the 600 spread is still attractive considering the risk in Mexico,” he said.
The most appreciated in 2023
With a gain of 8.97% against the dollar so far in 2023, the peso is the most appreciated currency of the 20 most traded currencies this year.
The second most appreciated is the Brazilian real, with a gain of 5.65%, followed by the pound sterling, which advances 4.14%, and the Swiss franc, which is revalued 3.67%, according to data from the Investing portal.
Other currencies that also manage to beat the dollar are: the euro (+2.39%), the Danish krone (+2.26%), the Swedish krona (+2.05%), the Canadian dollar (+1.25%), the Singapore dollar ( +0.95%) and the Indian rupee (+0.74%).
