‘Superpeso’ hits its best level since August; Inflation in the US could spoil the party

The Mexican currency reached its highest level in more than four months, closing, this Monday, January 8, at 16.81 pesos per dollar; However, traders expect a readout of key data from US inflation this week, amid bets on when the Federal Reserve will begin cutting interest rates.

Although emerging market assets fell last week after investors questioned how quickly the Fed could cut rates this year, survey data from the New York Federal Reserve showed consumer inflation expectations fell to a three-year low. Therefore, US yields fell after the data, increasing appetite for higher-yielding Latin American currenciessaid Bertrand Delgado, strategist at Societe Generale.

“To the extent that US inflation continues to fall, especially core inflation, this will continue to favor global risk appetite and Latin America in particular,” Delgado said.

The Mexican peso strengthened 0.3 percent and reached its highest level since late August. The rise in US rates makes the weight carry seems more attractive, after last week’s monetary policy minutes showed that Mexican central bankers are in no hurry to reduce borrowing costssaid Miguel Iturribarria of BBVA Mexico.

“Markets are hoping that this week’s inflation data could open the door to a more dovish Fed,” he said. However, he said it was “too early” to think about a rate cut and continues to expect some volatility in the peso in the coming months.

In addition to inflation, El Financiero columnist Enrique Quintana pointed out that another factor to take into account in the appreciation of the Mexican currency derives from electoral process in both countries.

“In Mexico, most investors have already discounted a victory for Claudia Sheinbaum in the presidential race in their expectations, but they also assume as the most likely scenario that Morena and his allies do not reach a qualified majority in Congress,” Quintana detailed in “The uncertain future of the dollar.”

If this circumstance arises, Quintana points out that the perception of risk for investments could increase in the coming months, which would negatively impact our currency.

-With information from Bloomberg.