USD/MXN: Banxico’s proactive rate hikes support the peso –Scotiabank

The Mexican peso is currently holding a small gain versus the US dollar in year-to-date terms. Sharp rises in domestic interest rates have supported the MXN and economists at Scotiabank expect policymakers to tighten rates further, holding USD/MXN within recent ranges.

Peso supported by tighter monetary policy

“Banxico’s proactive rate hikes are arguably the major factor behind the peso’s strength, and we anticipate that for the near term, we will continue to see its rate hikes matching the pace set by the Federal Reserve, keeping the interest rate spread between the two countries near 600 bps.” 

“There are some risks looming on the horizon, such as the USMCA arbitrage against Mexico by Canada and the US due to energy policy, inflation risks to what are so far resilient remittance flows, as well as continued weak foreign investment, but we don’t see these being a major headwind for MXN during this calendar year.”