Why the Mexican Peso Surged Against the USD?

Key Points:

• Mexican peso surged to 17.544, its strongest since July 2017.
• Banxico’s rate hike to 11.25% supports peso amid diverging US and Mexican monetary policies.
• Slower-than-expected US inflation sparks speculation of Fed pausing rate hikes.

The Mexican peso has recently surged, reaching 17.544 against the US dollar, marking its highest value since July 2017. This surge comes as the US dollar weakened against several major currencies, including the peso, following reports of slower-than-expected US inflation.

In April, US inflation dropped to 4.9%, the lowest year-over-year increase in two years, leading to speculation that the Federal Reserve may pause its interest rate hikes. The lower inflation was largely due to slower growth in food prices and a further decline in energy costs. However, core inflation remained high at 5.5%, suggesting that interest rates might need to stay elevated for an extended period.

The peso’s strength is further bolstered by the diverging monetary policies of the US and Mexico. While the Fed is contemplating a pause, Mexico’s central bank, Banxico, raised its rates to a record high of 11.25% in March. Despite a greater-than-expected decrease in annual headline inflation, Banxico’s aggressive stance has provided strong support for the peso.

Additionally, Mexico’s strategic location near the US has made it an attractive destination for foreign companies looking to diversify production from China and target the American market. The robust US economy has also led to an increase in remittances from Mexican expatriates, further strengthening the peso.

As a result of these factors, the Mexican peso has reached levels not seen since 2017, with potential for further gains if current trends continue. However, the RSI on the USD/MXN pair indicates it may be in an extreme oversold condition, suggesting a potential pullback.