Commerzbank Sees Softer Mexican Peso vs U.S. Dollar

Key Moments

Shifting Policy Stance Seen as Negative for MXN

Commerzbank strategists Michael Pfister and Norman Liebke assess that the Mexican Peso (MXN) is poised to lose ground against the U.S. Dollar (USD) over the next several weeks. They point to Banco de México’s (Banxico) continued dovish approach, even as inflation risks increase, as a key driver. According to their analysis, interest rates in Mexico are moving into expansionary territory, which they believe will put downward pressure on the currency and push USD/MXN higher as investors refocus on monetary policy dynamics.

Performance Since the Start of the Year

The analysts note that the Mexican currency has delivered strong gains recently. They state that, since the beginning of this year, the Peso has been among the top performers within the group of liquid currencies, advancing nearly 4% against the U.S. Dollar. They observe that USD/MXN is trading around levels last seen before the Mexican presidential election in June 2024, a period prior to escalating concerns over U.S.-Mexico relations and debate surrounding a possible two-thirds majority and constitutional changes.

Banxico’s Recent and Expected Rate Moves

Pfister and Liebke reiterate their prior concerns about Banxico’s policy bias. They emphasize that:

• “Since the beginning of this year, the Mexican peso has been one of the top performers among liquid currencies, appreciating nearly 4% against the US dollar. One might be tempted to think this is unremarkable, as it simply continues last year’s performance. USD/MXN is currently trading at a level similar to that seen before the Mexican presidential election in June 2024, before the turmoil surrounding relations with the US and concerns about the two-thirds majority and constitutional amendments gained momentum.”
• “These market expectations should come as no surprise. We warned several times last year about Banxico’s dovish stance. In March, the razor-thin majority of surveyed economists was in favor of keeping rates unchanged – which, given the uncertainties, would not have been entirely unjustified – but Banxico nevertheless cut rates by 25 basis points.”

They add that a similar move is anticipated imminently, stating that another 25-basis-point reduction is likely to be delivered this week. In their view, such easing contrasts with expectations that other central banks may adopt more restrictive stances, a divergence they argue is naturally unfavorable for the Peso.

Market Expectations Versus Commerzbank’s View

According to the analysts, current market pricing reflects a belief that recent developments will constrain Banxico’s ability to continue cutting rates and could eventually compel it to raise them again. As they describe it:

• “The market currently assumes that these developments will prevent Banxico from cutting rates further and will instead force them to raise rates again. The upcoming rate cut is not priced in; rather, two rate hikes are expected within the next twelve months. We remain skeptical that this will actually happen.”

Pfister and Liebke take a more cautious stance, expressing doubt that the anticipated tightening path will occur as implied by market expectations.

Implications for USD/MXN and Relative Currency Performance

The analysts argue that ongoing policy easing in Mexico, especially amid geopolitical uncertainty, is undermining the Peso’s relative appeal. They state:

• “Policymakers are ensuring that the peso remains among the weaker performers by continuing to cut interest rates despite the uncertainty in the Middle East. We expect this trend to continue and therefore anticipate further MXN weakness in the coming weeks.”

On this basis, Commerzbank expects USD/MXN to move higher as investors reassess the relative policy outlook and risk environment.

Policy and Market Expectations Summary