We think a sustained period of outperformance in the US economy will fade in the coming months, with the peso likely to come under selling pressure in early 2024 as investors brace for a slowing in exogenous capital flows. Inbound investment looks vulnerable, with large multinationals likely to soft-pedal the realignment of global manufacturing footprints in response to a reversion in American consumer demand, and a relatively mild rise in Hispanic unemployment rates could take a serious toll on monthly remittance volumes.

Historically, episodes of Mexican peso weakness have been associated with sharp slowdowns in the US economy – illustrated here using the Sahm Rule, which indicates that a US recession has begun when the 3-month moving average of the national unemployment rate rises by 0.5 percentage points or more relative to its low during the prior 12 months.

USDMXN Exchange Rate and Sahm Rule Measure of US Unemployment

The carry trade – traditionally inversely-geared relative to background volatility levels – might unwind rather swiftly if financial market turbulence increases and typical “dollar smile” dynamics come back into play north of the Rio Grande. Although the peso could temporarily outperform as the Federal Reserve accelerates its communications pivot, fundamental vulnerabilities should exact a toll over the longer run, contributing to generalised weakness toward the latter half of 2024.

Estimated USDMXN Expiration Range By Confidence Interval