FX.co ★ Mexican Peso Halts Rally

The Mexican peso recently depreciated beyond 17.62 against the US dollar, interrupting its progression towards the strongest levels observed since July 2024. This decline is attributed to a resurgence of global risk aversion triggered by renewed geopolitical and trade tensions. Specifically, fresh US tariff threats targeting Europe have nudged investors towards safer and more liquid assets, resulting in a pullback from the peso. Nonetheless, the demand for pesos remains supported by Mexico’s appealing yield profile, which is bolstered by the increasingly cautious stance of Banco de México. The central bank has decelerated its rate cut cycle, maintaining the policy rate at 7% and indicating a conservative approach due to persistent core inflation. This has preserved one of the widest real yield differentials in emerging markets, thereby sustaining capital inflow into peso-denominated fixed income securities. As expectations grow that monetary policy will remain tight for an extended period, it has tightened the local rate curves and reduced the need for hedging, enabling carry trades to withstand instances of dollar appreciation.