Mexican Peso breaks 18.00 as carry trade loses its edge

• USD/MXN clears 18.00 as Peso selling extends into second day.
• Narrowing Mexico-US rate differential weakens Peso’s carry appeal.
• Five-percent Treasury yields accelerate capital rotation back toward Dollar.

The Mexican Peso extended its losses against the US Dollar for the second straight day, down 0.29%, as USD/MXN decisively surpassed the psychological 18.00 for the first time since the beginning of April 2026, trading at 18.04 at the time of writing.

USD/MXN hits six-month high as shrinking rate gap drives repatriation

Some of the reasons for the sharp fall of the Peso are the reduction of interest rate differentials between Mexico and major economies, as well as the rise of US Treasury yields, which are north of 5%, triggering large capital repatriation.

An analyst cited by Reuters sees the move as a “correction and reduction in long Peso positions, rather than a structural shift” towards the emerging market currency.

However, with interest rates set by the Bank of Mexico (Banxico) near 6.50% and the Federal Reserve hiking rates to the 3.75%-4% range and poised for at least another increase to the 4%-4.25% area, the differential narrowed to 2.50%, its lowest level after peaking at around 6% post the Covid pandemic.

This, coupled with elevated US Treasury yields paying interest in the range of 5.23%-5.61%, is more appealing than taking advantage of the yield on MBONOS in Mexico, given the risk of potential exchange rate losses.

In the meantime, Federal Reserve officials crossed the wires, led by the New York Fed President John Williams, saying that they’re not in “urgency” to tighten monetary policy. Against this view lies St. Louis Fed Alberto Musalem, who commented that monetary policy is accommodative.

The Chicago Fed President Austan Goolsbee commented that “the fact we have been 5-1/2 years above inflation target is playing with fire.” Fed Governor Michael Barr said that “there is a need to recalibrate policy,” and that the base case suggests that “further policy adjustments are likely to be needed.”

US data-wise, the Conference Board reported that consumer sentiment deteriorated, driven by elevated prices, particularly in Oil and Gas, which had reached new heights. Other data showed that the job market is solid, as job openings dipped.

Ahead, Mexico’s economic docket is light, with traders eyeing Business Confidence and the S&P Global Manufacturing PMI, both September data releases, on October 1. In the US, traders eye ADP Employment Change, US GDP, the Fed’s preferred inflation gauge, followed by Friday’s Nonfarm Payrolls report.

USD/MXN Price Forecast: Technical Outlook

In the daily chart, USD/MXN trades at 18.0496, extending its recovery well above the 50-,100- and 200-day simple moving average (SMA) cluster at 17.1914 and reinforcing a bullish near-term bias. The pair is now pressing against a medium-term descending resistance trend line drawn from 18.1651, while the Relative Strength Index (14) at 82.80 shows overbought conditions that hint at stretched upside momentum as price challenges this overhead structure and the broader long-term downtrend line that caps the recent highs slightly above 18.00.

On the downside, initial support is seen at the SMA cluster around 17.19, which should act as a first buffer on any corrective pullback, ahead of the horizontal floor at 16.89. On the topside, a clear break above the medium-term descending resistance line around the current area would open the way towards the higher long-term downtrend barrier located just above 18.00, where the latest peak near 18.12 sits as the next notable resistance reference.

(The technical analysis of this story was written with the help of an AI tool. Know more.)