USD/MXN: Banxico continues to signal attractive real interest rates, supporting the Peso – Commerzbank

The Mexican central bank has ended its cycle of interest rate hikes but continues to signal attractive real interest rates. This supports the Peso, although downside risks emanate from US economic developments, economists at Commerzbank report.

An important risk factor for the MXN remains developments in the US

“If inflation falls as expected, we see room for rate cuts towards the end of this year or early in 2024. However, we do not expect the Peso to depreciate significantly against the USD as any rate cuts are likely to be in line with the Fed's own easing efforts.”

“If the US economy cools down more than expected, this would also weigh on the Mexican outlook. This would likely limit upside risks to inflation and could imply a sharper cut in Mexican interest rates and a correspondingly less attractive real interest rate outlook, which would weigh on the Peso.”

“In our baseline scenario, however, we expect solid domestic demand and Banxico's vigilance to continue to support the Peso in the face of a still uncertain inflation outlook.”

Source: Commerzbank Research