The Mexican Peso is Showing Signs of Strength

The Mexican peso is showing signs of strength, and it may be the best currency in the world this year. But, for how long? The currency is a standout in a year when other emerging markets have been suffering. The lira and ruble are both on the decline, while the Brazilian real is struggling with political volatility and a fading commodity boom. And the Colombian peso has been hammered by falling crude oil prices and a deep economic slowdown.

Against that backdrop, the Mexican peso is up more than 12% this year and trading around 17 pesos for every dollar at money exchange houses along San Ysidro Boulevard in Juarez. That’s more than double the level that was seen in January. The gains have been fuelled by healthy Mexican exports, interest in Mexico’s sovereign debt, remittances from Mexicans living in the U.S. and a growing global economy.

But the peso’s rise hasn’t been without risks. First, the government is trying to rein in spending to curb inflation, which could limit the growth of its economy. Second, investors are concerned about a potential U.S. recession next year, which could make risky assets like the greenback less attractive. That would further limit the strength of the Mexican peso.

The peso is also being propped up by the Bank of Why is the Mexican peso showing signs of strength? rate hikes, which have helped slow the country’s inflation. That is important, because higher inflation hurts the purchasing power of the Mexican people. But the peso’s strength has its limits, and the currency could weaken in coming weeks unless something very surprising happens.

For now, the Mexican peso is benefiting from a resurgence of the global economy. That’s boosting demand for Mexican goods, including agro-products, which are in high demand in China and other parts of Asia. It’s also attracting investors looking for yield in the face of low global bond returns.

And a rising interest rate environment should further boost the peso, as it makes holding dollars more expensive and attracts foreign capital into the country. But that’s only a short-term driver, and the peso’s rise will likely be capped by a broader slowdown in the global economy.

Inflation data and central bank monetary policy are the key factors to watch this week for USD/MXN traders. The US economic docket is empty on Monday, but Mexico’s inflation numbers are due on Tuesday. That could give traders clues on the path toward the Bank of Mexico’s May 18 monetary policy decision.

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This story originally appeared on MarketWatch, and is republished with permission.

This is part of a series on the state of the global economy and what it means for investors. For more stories, visit MarketWatch’s Global Economics page.

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