During previous tightening cycles of the Federal Reserve, currencies that had been used to invest the proceed of carry trades strategies had seen sudden reversals. This time had been different since, Banxico managed very well and kept the Mexican Peso away from a devaluation that could have seen prices going out of control due to cost of imported goods and services.
The appreciation of the Peso was not cost free however, since the tightening cycle of 725 bps in 2 years was seen somehow as a risk that could offset the recovery of the economy from Covid19 after the 2020 slump.
The 2021 recovery and the steady 2022 and a positive 2023 (projected a +2.3%) as well gave confidence from the financial community to the ability of Governor Victoria Rodriguez to fight a 20 year high inflation rate last September, at 8.7%.
Rates were kept at 11.25% at last month meeting, and the Real -ex-ante policy rate strategy, proved to be appreciated and respected.
The intention to keep a positive Real Interest Rate of circa 6% is a message that policy makers are aware of country risk and other risk premium required by international investors. The Mexican economy remained resilient despite a complex external environment with Labor market indicators reflected strength, with increasing labor participation, low unemployment rates, and wage dynamics.
The Mexican peso appreciated, reaching levels unseen in years, supported by interest rate differentials and sound macroeconomic fundamentals while the Mexican stock market showed gains, and the default risk premium decreased. After a multiyear high on April 2020 at 25.76 MXN/USD reached 17.09, a level seen last time on May 2016, a 33.4% appreciation. The pair is still 73% above its 2009 low thus if productive policies would continue the pair could test area 15.50 before the end of the year. Above 17.54 would be possible to see a trading range formation.
