The Mexican peso rose to its strongest level in almost six years after the Federal Reserve raised interest rates and hinted at the end of its tightening cycle.
(Bloomberg) — The Mexican peso rose to its strongest level in almost six years after the Federal Reserve raised interest rates and hinted at the end of its tightening cycle.
The Fed’s decision to omit a line anticipating more hikes lifted emerging-market assets, with a gauge for developing-nation currencies rising to the highest in two weeks. The peso gained as much as 0.8% to 17.8315 per dollar, the strongest since September 2017.
“Stable US rates and a still resilient US economy is a bullish combination for the MXN,” said Erick Martinez Magana, a strategist at Barclays in New York. “We expect this price action to continue until we get initial signs that the US labor market is significantly weakening.”
The peso has been on a tear this year, supported by high interest rates, strong remittances and a relatively quiet political landscape. Mexico has also become a destination for factories looking to relocate closer to the US market, a trend called nearshoring that is boosting investment and demand for the currency.
“The issue of nearshoring and remittances gives a very positive perspective to the peso,” said Alfredo Puig, a trader at Mexican brokerage Vector in Monterrey, Mexico.
The peso has rallied about 9% versus the greenback this year, out-pacing all 15 major peers tracked by Bloomberg. If the run continues, the rally could eventually impact demand for exports, Mexico’s Deputy Finance Minister Gabriel Yorio said in an interview with Bloomberg News on Tuesday.
“However, it is not yet inhibiting exports or economic activity,” he said, declining to specify if there was a particular level that could worry policymakers.
Traders were focused on Jerome Powell’s remarks after the Fed signaled a pause in one of its fastest tightening campaigns in history. Powell said his forecast is for modest US growth and not a recession, while reiterating that the process of getting inflation down has a long ways to go. He also noted that rates are “not far off’ from the restrictive level.
Mexico’s central bank is also considering halting its cycle of interest rate hikes in the next board meeting on May 18, according to Governor Victoria Rodriguez Ceja.
“The environment of a pause leaves room for some more broad-based dollar depreciation and risk appetite,” said Claudia Ceja, a strategist at BBVA in Mexico City. “In this environment, the peso wins because the carry is attractive, the fundamentals are stable and liquidity is high. So we continue to see room to reach 17.50 per dollar.”
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