Mexican Peso: Banxico’s lag behind Fed keeps currency under pressure – ING

The Mexican Peso remains under pressure as dovish Banxico commentary and a narrowing policy rate differential with the Federal Reserve weigh on sentiment, according to ING’s Chris Turner. He notes that it has been the weakest emerging market currency since early September. Unless Banxico delivers a hawkish surprise at its 5 November meeting, Turner expects MXN to stay vulnerable. US tech exposure flagged by the IMF adds to the pressure, with USD/MXN expected to move towards the 19.00–19.10 area over the coming weeks.

Can the Peso withstand a narrowing policy rate differential?

"Since US rates exploded higher at the start of September, the Mexican peso is by far the worst-performing EM currency. It is close to 8% weaker versus the dollar. The next worst currency is the Romanian leu at around 4%."

"The peso has been hit hard by dovish Banxico rhetoric, outlining that it did not plan to mechanically track the Fed with rate hikes. Should Banxico fail to match a presumed rate hike from the Fed in December, the Banxico-Fed policy rate spread will reach the narrowest on record and leave the peso exposed at a difficult time for risk assets."

"Barring a hawkish surprise from Banxico at its 5 November meeting, we expect the peso to remain vulnerable."

"We note that in the IMF financial stability report, Mexico was seen to have the near entirety of its foreign portfolio investments in US securities, which the IMF saw as AI-chasing behaviour."

"Unrest in the tech sector may therefore be weighing on the peso. 19.00/19.10 looks to be the trajectory for USD/MXN over the coming weeks. Banxico has done a number on the peso."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)