Mexican peso reduces growth due to tough policy central bank
2023.02.07 14:28
Mexican peso reduces growth due to tough policy central bank
By Kristina Sobol
Budrigannews.com – The aggressive policy tightening implemented by the central bank to combat rising inflation is expected to reduce the advance that the Mexican peso has made in recent months, but it will continue to trade at firm levels.
Even though the decline would reverse some of the currency’s nearly 5% appreciation in 2022, its best performance in five years, the peso would still remain close to 20 per US dollar, where it has fluctuated since 2017.
The unit increased as hawkish policymakers increased rates by 50 basis points in December to a record 10.5%. Since April 2021, the central bank, or Banxico, has increased by a total of 650 basis points.
According to the median estimate of 19 foreign currency strategists polled between February 2 and 6, the peso is expected to trade at 19.83 against the US dollar in a year, sustaining a potential 3.5% loss from Monday’s close of 19.16.
BofA analysts wrote in a report, “Given the pressures… from a tight labor market, nearshoring, and unanchored inflation expectations, there is not much room for Banxico to risk depreciation by decoupling from the Fed.”
Persistent pressures that exacerbated inflation in January are likely to provide the peso with additional support this week, with an anticipated 25 basis point increase in Mexico’s benchmark rate to 10.75%.
A good trade opportunity for risk-averse investors would be this, which would represent a margin of 600 basis points above the upper limit of U.S. Fed rates. The peso has gained 1.6% year to date against the dollar.
According to the poll, Brazil’s real is expected to continue its downward trend, falling 1.7% in a year to 5.24 per US dollar from 5.15 on Monday. The currency has gained 1% since the beginning of 2023.
Markets in Brazil have been caught in the crossfire of a growing dispute between the traditional leadership of the central bank and a new socially conscious government that has openly criticized it for keeping interest rates high.
The most recent remarks made by President Luiz Inacio Lula da Silva in opposition to the bank’s stringent policy resulted in a decline in the real on Monday. A survey revealed that it is now anticipated to begin easing in November rather than September.
