The Mexican peso has been reaching new highs recently, grabbing the attention of traders. Despite warnings of overvaluation, traders seem unfazed by this.
The peso rose 1.4% on Wednesday, reaching its highest level since 2015. This increase was fueled by the release of US inflation data, giving people hope that the Federal Reserve will end its most aggressive interest rate policy in decades. Alongside global markets, the peso also experienced an upward trend. Meanwhile, the Chinese yuan fell approximately 0.9% against the US dollar at 3:56 pm in New York but remained one of the best-performing Latin American currencies of the day.
Year-to-date, the peso has risen nearly 16% against the US dollar, second only to the Colombian peso among emerging markets. Due to bets on a delayed easing cycle, the so-called near-shore trend, and robust remittances, the peso has earned the moniker “super peso.”
Earlier data showed that Mexican industrial production exceeded expectations in May, supporting the expectation that the Mexican central bank will not cut interest rates soon. Christian Lawrence, cross-asset strategist at Rabobank, stated that this data will continue to drive investors to buy pesos.
However, many analysts believe that the peso’s exchange rate is already overvalued due to investors flocking to the country to take advantage of the interest rate differential with developed markets. According to one measure, the peso’s real exchange rate recently reached its highest level in nearly 15 years. Miguel Iturbe, a strategist at BBVA Mexico, wrote in a report that the peso is overvalued, but he believes it will remain strong in the coming months, albeit possibly depreciating in the end.
The peso is supported by some structural changes, including disruptions in supply chains during the COVID-19 pandemic, deteriorating US-China trade relations, and manufacturers shifting their operations to Mexico, which is closer to the US market. This is expected to bring in substantial new investments. Additionally, Mexico receives approximately $60 billion in remittances annually, further supporting the peso’s exchange rate.
Marco Castro, a strategist at BNP Paribas, expects the peso to gradually appreciate in the future, with the peso-to-dollar exchange rate reaching 16.50 by the end of 2024 from the current 16.88. Castro stated in a report that given their assumptions of a mild US recession and structurally weak dollar, the peso will continue to be supported.
In summary, the Mexican peso has shown strong performance recently, attracting investors’ attention. While some believe the peso is overvalued, analysts still predict that the peso will continue to rise, supported by structural factors and interest rate differentials. However, there is still uncertainty in the market, and investors should closely monitor market dynamics.
