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The peso’s bull run has run out of steam.

After a world-beating drive higher, the Mexican peso lost momentum late in the third quarter and has largely failed to regain it, staging a relatively modest rebound against a retreating dollar. Several factors are in play: A drastic increase in government spending plans – coming ahead of the presidential election in June 2024 – spooked investors. The foreign exchange commission’s decision to unwind its non-deliverable hedging programme put pressure on spot rates. And the Banxico began making dovish noises, suggesting that it might begin cutting rates by March.

Change in spot exchange rates, DXY and MXNUSD

We think markets overreacted to all three: In relative terms, the government’s fiscal position is strong. The decision to shelve a peso-supportive intervention tool should be seen as a vote of confidence in underlying fundamentals. And real rate differentials remain extremely supportive, with authorities still strongly committed to maintaining positive carry.

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