Peso closes at its best level against the dollar since March 2020

The Mexican peso closed this Monday at its best level against the dollar since March 2020, supported by the expectation that the Bank of Mexico (Banxico) will increase its interest rate by 75 basis points (bp) on Thursday, in addition to the light at the end of the tunnel in the cycle of Federal Reserve hikes (Fed) from the United States.

The exchange rate It closed at 19.4494 pesos per dollar, its lowest level since March 3, 2020, when it was quoted at 19.3920 units, according to data from Banxico.

In Monday’s session, the Mexican coin it appreciated 0.36% or 6.97 cents against the dollar. It has five consecutive days with gains against the US currency, a period during which it has advanced 1.82 percent.

“The strength of the peso from a monetary approach is related to the expectation that Banco de México will also raise its interest rate by 75 basis points and from a flow approach, (it is related) to the foreign currency that arrives from exports, remittances and investment. direct foreign exchange,” said Gabriela Siller, director of analysis at Banco Base.

In the session this Monday, the exchange rate touched a minimum of 19.4318 pesos per dollar, close to the minimum in the year of 19.4125 units that touched on May 30 last.

Next Thursday, the Bank of Mexico will have its monetary policy meeting in which the Governing Board is expected to increase its rate again by 75 basis points, as the Fed did last week, with which the rate differential between the two central banks would remain at 600 basis points.

In its rate increase announcement, the US central bank opened the door to slowing down the pace of its rate increases as of its next meeting in December, which has supported the rise of the Mexican peso and weakened the US dollar.

Since the Fed’s announcement, the dollar index – which measures the strength of the US dollar against six currencies – has fallen 1.26%, standing at 110.07 units this Monday, November 7.

“The dollar has weakened a bit because there are few increases in the interest rate and although there is still a restrictive monetary policy, the light is already at the end of the road,” said Gabriela Siller.

So far this year, the Mexican peso has appreciated 5.16% against the dollar, being one of the few currencies that have appreciated in the year against the United States currency.

The Russian ruble it appreciates 18.29%, at 61.00 units per dollar, while the Brazilian real gains 7.42%, for a parity of 5.1572 reais per US bill. Likewise, the Peruvian sol manages to gain ground against the dollar, with an appreciation of 0.79%, trading at 3.9538 units per greenback.

“In general, there have been few changes, the exchange rate remains strong because the interest rate will most likely continue to rise,” said Luis Adrián Muñiz, deputy director of economic analysis at Vector Casa de Bolsa.

Luis Adrián Muñiz said that the 1% growth of the Mexican economy in the third quarter of 2022 (released last week) is bad news in terms of inflation, since it can cause demand pressures that were not on the radar.

“The growth issue brings with it implications for local monetary policy in that rates will continue to rise,” said the Vector analyst, which also supports the rise of the Mexican peso.

Janneth Quiroz, deputy director of analysis at Monex Casa de Bolsa, pointed out that the increase of 75 basis points by Banxico is already “quite discounted” by the market. She said that the focus will be on the tone of the decision statement as well as on the guidance for the coming months that the Mexican central bank will give.

“Where the attention is going to be is going to be in itself, a signal is given in the guide to the future that Banco de México now publishes on maintaining a relative monetary policy with respect to that of the United States or not,” commented Janneth Quiroz.

The Monex analyst said that the first support for the peso in this downward cycle in which it finds itself is the minimum it has already touched in the year, of 19.41 units. “If it breaks, the exchange rate could go to 19.25 (pesos per dollar),” she assured.

Gabriela Siller said that if Banxico’s statement is restrictive or if the increase in the interest rate is greater than 75 bp, there would be a “perfect excuse” for the exchange rate to break its minimum level in the year and drop to levels of 19.20 pesos per dollar.

“It is becoming increasingly clear to the market that when we reach the maximum of the interest rate in Mexico and in the United States, very probably the United States will be able to think about lowering the interest rate before Mexico, so that issue that the rate may begin to fall in the United States before it does in Mexico, it is also an issue that helps the exchange rate,” said Adrián Muñiz.

Analysts agreed that another factor that could support the rise of the Mexican peso in the coming days is the inflation data in the United States, which will be released on Thursday.

They assured that if the fourth consecutive monthly decrease in price increases is confirmed, the dollar will weaken, while the peso could find more room to appreciate.