The Mexican peso has depreciated beyond 18.45 per US dollar, retreating from its heights in July 2024. This decline is attributed to sluggish domestic growth, a narrowing yield differential, and a stronger US dollar. In the third quarter, Mexico's economy contracted, with GDP declining by 0.3% quarter-on-quarter and manufacturing activity exhibiting notable weakness. This indicates that growth and export levels are weaker than previously anticipated, casting doubt on the sustainability of Mexico's interest rate premium. The Bank of Mexico initiated an easing policy in November with a 25 basis point reduction to 7.25%. Its recent minutes highlight a more cautious and data-driven approach for further rate cuts, reducing the carry trade advantage that previously supported the peso's rally. Meanwhile, unexpected positive US labor data, marked by a substantial payroll increase, have lowered the likelihood of a near-term Fed rate cut, thereby fortifying the dollar. Ongoing trade and policy concerns, including tariff tensions with the US and uncertainties surrounding the USMCA review, continue to exert downward pressure on the peso.
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