Outlook

Most of the factors driving the peso’s post-pandemic outperformance are still in place. Implied interest rate trajectories suggest that Banxico will cut more slowly and more incrementally than its Latin American counterparts, leaving the currency with one of the best volatility-adjusted carry profiles in the region. Carry Return Index, 1999 = 100 Remittance volumes keep setting new records. Remittances from workers outside Mexico, millions USD And – although reshoring flows are likely overhyped – the country is well-placed for sustained economic gains as supply chains are re-routed through geographically-proximate and politically-compatible parts of the world. We think the peso could...

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...