Key Moments
- The Mexican Peso has been the weakest emerging market currency since early September, dropping close to 8% against the US dollar.
- Dovish communication from Banxico and a narrowing policy rate spread with the Federal Reserve are seen as key drivers of MXN weakness.
- Without a hawkish surprise from Banxico at its 5 November meeting, USD/MXN is expected to move toward the 19.00–19.10 area in the coming weeks.
Policy Divergence Puts MXN on the Back Foot
Chris Turner at ING notes that the Mexican Peso has significantly underperformed its emerging market peers since early September. He points out that “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%.”
According to Turner, the key factor undermining MXN has been the tone from Banco de México (Banxico). He highlights that “the peso has been hit hard by dovish Banxico rhetoric, outlining that it did not plan to mechanically track the Fed with rate hikes.” This stance has sharpened investor focus on the interest rate differential between Banxico and the Federal Reserve.
Turner warns that if Banxico does not follow what he describes as a presumed Federal Reserve rate increase 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.”
Upcoming 5 November Decision Seen as Critical
Market attention is centered on Banxico’s 5 November policy meeting. Turner states: “Barring a hawkish surprise from Banxico at its 5 November meeting, we expect the peso to remain vulnerable.” The suggestion is that only a more aggressive policy message or move from Banxico could offer the currency some relief in the near term.
IMF Concerns on Foreign Portfolio Positioning
Turner also refers to findings in a recent multilateral assessment, noting: “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.”
He links this exposure to recent developments in a key US sector, observing that “unrest in the tech sector may therefore be weighing on the peso.”
USD/MXN Outlook and Market Implications
Against this backdrop, Turner outlines his expectations for the currency pair: “19.00/19.10 looks to be the trajectory for USD/MXN over the coming weeks. Banxico has done a number on the peso.”
| Factor | Comment |
|---|---|
| Relative EM performance | MXN identified as the weakest EM currency since early September, down close to 8% versus USD. |
| Policy stance | Dovish Banxico rhetoric and reluctance to closely follow Fed rate hikes seen as pressuring MXN. |
| Rate spread risk | Failure to match a presumed Fed rate hike in December would push the Banxico-Fed policy spread to a record narrow level. |
| Portfolio exposure | IMF report cited for noting Mexico’s foreign portfolio investments are largely concentrated in US securities. |
| USD/MXN view | Trajectory for USD/MXN seen toward the 19.00–19.10 area in the coming weeks. |
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