The strength of the peso is expected to decline in 2024, what are the reasons? • Economy and Finance • Forbes Mexico

The Mexican peso’s rally is likely to lose some momentum in 2024 as an expected shift in Banco’s monetary policy toward a less restrictive approach could reduce the currency’s attractive rate differential, according to a Reuters survey.

In 2023, the peso had its strongest performance against the dollar in more than three decades as the central bank left its key rate at a multi-year high of 11.25% for most of the year before inflation eased. The tax had promoted capital inflows.

But the peso is now expected to trade at 18 to the dollar by the end of the year, down 5.4% from around 17 on Wednesday, according to the average estimate of 25 currency strategists surveyed Jan. 2-4.

The expected decline is larger than the consensus inflation forecast of 4%, meaning the peso will come under some pressure from a tighter rate differential in the future, in addition to the usual adjustment to rising consumer prices.

Read: Analysts slightly improve forecasts for Mexican economy in 2024

“Central banks will begin to make their rates more flexible in 2024 and we estimate that the rate differential between Mexico and the United States will narrow to between 100 and 150 basis points,” said Montserrat Aldave, chief economist at Finmex.

With a rate of 11.25%, the Banxico instrument continues to offer a large margin on the Federal Reserve rate, which ranges between 5.25% and 5.50%, which investors capitalize on in profitable bets called “carry trades.”

The entity’s governor Victoria Rodriguez said last month that Banxico could consider cutting its reference rate in the first quarter of 2024.

Inflation at the annual rate stood at 4.32% in November, well below the previous 20-year record of 8.70% registered in August 2022.

Meanwhile, the monetary outlook in the United States is less clear, even though recent Federal Reserve minutes show a growing sentiment among policymakers that inflation is under control and about the downside risks to the economy arising from restrictive policy. There are concerns.

They deny that the elections will have a significant impact on the peso

Forex strategists are also paying attention to events surrounding the June 2 presidential elections in Mexico. Ruling party candidate Claudia Sheinbaum has a big lead over her main rival Xochitl Galvez.

“We do not expect any significant impact on the peso, as volatility in the previous (electoral) episode only increased a month before (the vote) and then subsided,” Finmex’s Aldway said.

Lee: Treasury responds, Mexican economy is strong and no signs of weakness

With information from Reuters

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