Mexican Peso hit by carry trade unwind as USD/MXN reclaims 18.60

USD/MXN climbs 0.60% to 18.68 after rebounding from 18.54.
Mexico's shrinking rate advantage threatens the Peso's carry-trade appeal.
December Fed hike odds reach 82% ahead of Warsh's press conference.

The Mexican Peso makes a U-turn and depreciates by 0.60% against the US Dollar, with the latter strengthening against a basket of six currencies, known as the US Dollar Index (DXY). The emerging-market currency feels the pain of unwinding the “carry trade” as most major central banks are poised to raise rates amid high inflation. The USD/MXN trades at 18.68, after bouncing off daily lows of 18.54.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Peso weakens as narrowing US-Mexico rate spreads and Fed tightening expectations fuel Dollar demand

As mentioned, the interest rate differential between the US and Mexico is poised to narrow further. Last September, the Federal Reserve raised rates 25 bps to 3.75%-4%; while the Bank of Mexico (Banxico) opted to hold rates unchanged.

Speculation among local economists in Mexico suggests that Banxico is not expected to adjust rates for the rest of this year and through 2027. On the contrary, the Fed is expected to raise rates at least once more this year, and 43 basis points next year.

In the meantime, data from Mexico revealed that the country posted a trade surplus of $1.069 billion in September, down from $3.489 billion in August.

Aside from this, political turmoil surrounds the country’s National Electoral Institute, the office responsible for organising elections. Its former president, Guadalupe Taddei, resigned on Monday, amid allegations of corruption, a decision backed by the Mexican President, Claudia Sheinbaum.

Of note, Mexico faces mid-term elections next year, with the Mexican Chamber of Deputies set to be renovated on June 6, 2027.

In the US, the economic docket was busy. The Conference Board (CB) Consumer Confidence improved in October, from 82.2 to 91.7, exceeding forecasts. Durable Goods Orders expanded by 1.8%, up from 0.1% in September, while the ADP Employment Change came in at 16.8K, below the previous number of 17.5K.

Now the focus shifts to the Fed’s policy decision on Wednesday. Money markets have priced in a hold, but for December, they have priced in an 82% chance of a rate hike. After that, investors await Fed Chair Kevin Warsh press conference, looking for clues regarding the path of interest rates.

USD/MXN Price Forecast: Technical outlook

Chart Analysis USD/MXN — USD/MXN daily chart

In the daily chart, USD/MXN trades at 18.6816, extending its advance well above the clustered 50/100/200-day simple moving averages (SMA) near 17.64, which now underpin a clear bullish bias. The pair is pressing into territory previously defined by a descending resistance trend line from the 21.08 peak, while the Relative Strength Index (14) at 68.9 hovers just below overbought levels, suggesting strong but stretched upward momentum rather than an immediate reversal signal.

On the downside, initial support is found at the multi-period SMA cluster around 17.64, before a more distant horizontal floor at 16.89. As long as spot holds above these underlying demand levels, dips are likely to attract buying interest, while any renewed reaction to the overhead descending trend-line resistance would hint at consolidation rather than a sustained top.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Mexican Peso FAQs

What key factors drive the Mexican Peso?

The Mexican Peso (MXN) is the most traded currency among its Latin American peers. Its value is broadly determined by the performance of the Mexican economy, the country’s central bank’s policy, the amount of foreign investment in the country and even the levels of remittances sent by Mexicans who live abroad, particularly in the United States. Geopolitical trends can also move MXN: for example, the process of nearshoring – or the decision by some firms to relocate manufacturing capacity and supply chains closer to their home countries – is also seen as a catalyst for the Mexican currency as the country is considered a key manufacturing hub in the American continent. Another catalyst for MXN is Oil prices as Mexico is a key exporter of the commodity.

How do decisions of the Banxico impact the Mexican Peso?

The main objective of Mexico’s central bank, also known as Banxico, is to maintain inflation at low and stable levels (at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%). To this end, the bank sets an appropriate level of interest rates. When inflation is too high, Banxico will attempt to tame it by raising interest rates, making it more expensive for households and businesses to borrow money, thus cooling demand and the overall economy. Higher interest rates are generally positive for the Mexican Peso (MXN) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken MXN.

How does economic data influence the value of the Mexican Peso?

Macroeconomic data releases are key to assess the state of the economy and can have an impact on the Mexican Peso (MXN) valuation. A strong Mexican economy, based on high economic growth, low unemployment and high confidence is good for MXN. Not only does it attract more foreign investment but it may encourage the Bank of Mexico (Banxico) to increase interest rates, particularly if this strength comes together with elevated inflation. However, if economic data is weak, MXN is likely to depreciate.

How does broader risk sentiment impact the Mexican Peso?

As an emerging-market currency, the Mexican Peso (MXN) tends to strive during risk-on periods, or when investors perceive that broader market risks are low and thus are eager to engage with investments that carry a higher risk. Conversely, MXN tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.