Commerzbank’s Michael Pfister and Norman Liebke argue that, after strong gains versus the Dollar, the Brazilian Real faces more downside risks than the Mexican Peso. A deeper BCB rate-cut cycle, softer Brazilian growth, election-related uncertainty and potential challenges to central bank independence contrast with more cautious Banxico easing and possible support from a favourable USMCA outcome for Mexico.

Diverging policy cycles and political risks

"For the coming months, there are several reasons why we expect the Mexican peso to continue catching up against the Brazilian real:"

"While the Banco Central do Brasil (BCB) is likely to cut its interest rates by well over 100 basis points this year—marking the start of its rate cut cycle—the Banco de México (Banxico) will probably implement only two to three rate cuts, with the cycle nearing completion."

"The interest rate differential is therefore likely to narrow in a direction that is bad for the real."

"Cooling the real economy was certainly also the goal of the sharp interest rate hikes, but now that this has been achieved, it also increases the likelihood of rate cuts by the BCB."

"If an extension is granted, it could trigger a small surge of euphoria for the peso."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)