Political uncertainty is growing ahead of the 2024 election, and the ruling Morena party may be tempted to deploy the public balance sheet in drumming up support – but the fiscal outlook should nonetheless remain far stronger than many of Mexico’s emerging market peers.

Instead, we think the biggest threats to the peso’s current valuation could come from abroad. Renewed currency intervention – or a more hawkish reset in Japan’s monetary policy stance – could trigger a surge in the yen and squeeze traders with leveraged positions – forcing a selloff in the peso. Under another scenario, a pronounced downturn in the US economy could derail three of the most powerful exchange rate determinants at once: slower wage growth would limit remittance flows, a drop in expected export volumes could curtail “nearshoring” investment volumes, and a flight to safety might force a violent unwind in dollar-funded carry trades. Finally, the currency’s correlation with US equities represents a vulnerability – if current levels of ebullience in US markets fade and volatility rises, the peso will fall.

30-day correlation, VIX and MXNUSD