Commerzbank analysts Michael Pfister and Norman Liebke argue that the Mexican Peso (MXN) is likely to weaken against the US Dollar (USD) in coming weeks as Banxico maintains a dovish stance despite rising inflation risks. They highlight that policy rates are moving into expansionary territory and expects USD/MXN to drift higher as monetary policy comes back into focus.

Banxico cuts seen weighing on peso

"Since the beginning of this year, the Mexican peso has been one of the top performers among liquid currencies, appreciating nearly 4% against the US dollar. One might be tempted to think this is unremarkable, as it simply continues last year's performance. USD/MXN is currently trading at a level similar to that seen before the Mexican presidential election in June 2024, before the turmoil surrounding relations with the US and concerns about the two-thirds majority and constitutional amendments gained momentum."

"These market expectations should come as no surprise. We warned several times last year about Banxico’s dovish stance. In March, the razor-thin majority of surveyed economists was in favor of keeping rates unchanged - which, given the uncertainties, would not have been entirely unjustified - but Banxico nevertheless cut rates by 25 basis points."

"Another rate cut of the same magnitude is likely to follow this week. At a time when other central banks are expected to shift toward more restrictive monetary policies, this naturally leads to a weaker peso."

"The market currently assumes that these developments will prevent Banxico from cutting rates further and will instead force them to raise rates again. The upcoming rate cut is not priced in; rather, two rate hikes are expected within the next twelve months. We remain skeptical that this will actually happen."

"Policymakers are ensuring that the peso remains among the weaker performers by continuing to cut interest rates despite the uncertainty in the Middle East. We expect this trend to continue and therefore anticipate further MXN weakness in the coming weeks."

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