Mexico City — The strength of the Mexican peso already has a deadline for analysts at Commerzbank, Germany’s fourth largest bank by total assets, and which identify two factors that could cause the currency to depreciate: a weakening of the US economy and the Mexican presidential elections in 2024.
“Mexico’s current structural problems are likely to come under increasing scrutiny as the country prepares for elections in July 2024,” Commerzbank analyst Esther Reichelt said in a note.
The inflow of US dollars into the country from remittances and foreign investment and the expectation of Mexico’s benefit from the relocation of production chains to the north of the country, better known as nearshoring, are some of the elements that caused the Mexican peso to strengthen.
Reichelt points out that the Mexican government’s policies such as energy create legal uncertainty and this could limit nearshoring profits.
In addition, “the July 2024 general election will be crucial for Mexico and the Mexican peso”, she said.
Although estimates consider a possible negative effect in the face of the electoral process, the strategist estimates that the local currency will trade at 17.40 to the US dollar in March 2024; 17.60 in June and at the close of the following year at 18 pesos per dollar.
The forecast contrasts with the consensus of Citibanamex analysts who project that the currency will begin to approach 18 pesos per dollar at the beginning of next year and will close the year at 19.25 per dollar.
So far this year, the Mexican peso has accumulated an appreciation of just over 14% against the dollar and is positioned as the second-best performing currency among emerging countries.
In addition to the local elections, the strategist adds the element of an economic slowdown in the US and, as a result, Mexican economic expectations are weighed down.
“The weakening US economy and political risks are likely to weigh on the peso,” he wrote.
The Mexican currency is currently trading above 17 per dollar, after hitting an eight-year high of 16.62 per dollar on July 28. For now, the strength of the local currency remains, according to the analyst. He estimates that by the end of the year the currency will trade at 17.20 per dollar.
This is supported by the attractive rate differential between the Bank of Mexico and the Federal Reserve, he said. In addition, he highlighted the monetary authority’s work to combat inflationary pressures.
The estimate of the European bank’s analyst looks optimistic compared to the consensus of Citibanamex analysts, who project a level of 17.95 pesos per dollar. On a disaggregated basis, BX+ brokerage estimates it will reach 19.50 pesos per dollar, and Bank of America 19 pesos per dollar.
Analysts expect the Bank of Mexico to start lowering its interest rate toward November. This effect will begin to narrow the rate differential and generate a limited depreciation in the Mexican currency, according to Finamex chief economist Jessica Roldan.
Under a standard deviation model, she estimates that in the next six months, the Mexican peso will trade between 15.93 and 19.37 pesos per unit with a 78.4% probability, according to Bloomberg data.
