The Mexican peso is expected to strengthen in the first half of 2025 as investor confidence grows under the new administration and volatility surrounding the U.S. election subsides, according to a forecast by UBS Group AG. Gabriela Soni, Director of Investment Strategy at UBS Mexico, predicts the peso could gain approximately 5% from current levels, reaching 18.50 pesos per dollar by mid-2025 and maintaining that strength through the end of the year.
This outlook contrasts with the median analyst forecast of 19.13 pesos per dollar, based on data compiled by Bloomberg. Soni attributes the potential rise in the peso’s value to a more favorable risk-reward ratio in the Mexican market as political uncertainty diminishes.
“We see a window of opportunity, a better risk-reward ratio, towards the end of this year, when all the uncertainty has passed,” Soni stated in an interview in Mexico City. However, she cautioned that in the short term, the currency is likely to remain volatile due to lingering market concerns.
Political Shifts and Market Reaction
The Mexican peso saw significant turbulence earlier this year following a landslide victory by the ruling coalition in the June elections. The Morena party’s majority in Congress allows for constitutional changes, a development that initially triggered concerns among investors. These concerns centered around legislative moves to replace judges with elected officials, raising fears about a potential weakening of the country’s checks and balances system.
As a result, the peso plummeted by around 14%, temporarily losing its position as the world's top-performing currency. However, it has since recovered approximately 2% from a near two-year low, coinciding with the passing of the judicial reform law ahead of President-elect Claudia Sheinbaum’s inauguration.
The peso’s recovery hinges on Sheinbaum’s ability to foster a more business-friendly environment than her predecessor, President Andrés Manuel López Obrador, according to Soni. “The peso will recover under Sheinbaum if she implements a more business-friendly stance than outgoing President Andrés Manuel López Obrador,” she said.
Investor Caution and Ongoing Volatility
Despite the optimistic outlook, analysts remain cautious about the peso’s trajectory. Several external factors continue to influence the currency’s performance, including the unwinding of carry trades—financial strategies where investors borrow in low-interest currencies to invest in higher-yielding assets—along with volatility from the U.S. election and widening interest rate differentials between Mexico and other emerging markets.
These factors have tempered the peso’s appeal among traders, leaving many to adopt a wait-and-see approach as Sheinbaum’s administration prepares to take office on October 1. Investors will be closely watching how the new government handles critical issues like judicial reform and infrastructure investment.
Soni noted that Sheinbaum has the opportunity to calm investor nerves if she opts to moderate some of the more controversial aspects of the judicial reform through secondary legislation. Tightening the requirements for judicial office could provide a positive signal to the market, demonstrating a commitment to maintaining a balance of power within the government.
Nearshoring and Infrastructure Investment
Another key issue for investors is the new administration’s plans to fund domestic infrastructure projects aimed at alleviating bottlenecks in logistics, energy, and water supplies. Addressing these challenges is essential to support the migration of more factories to Mexico under the so-called nearshoring strategy, where companies move production closer to the United States.
Soni emphasized the importance of clarity around these investment plans. “If a plan is sent out where investments are made in all these areas, in order to resolve the bottlenecks, then it could also be a catalyst to attract more investments to Mexico,” she said.
To finance these infrastructure projects, Sheinbaum will need to design an “opening to the private sector,” Soni explained, as private investment will be critical to realizing the country’s nearshoring potential.
Budget and Fiscal Strategy
The peso could also gain additional support if the Sheinbaum administration presents a clear fiscal strategy aimed at reducing Mexico’s budget deficit. Currently, the deficit stands at 5.9% of gross domestic product (GDP), the highest level since the 1980s. Both Sheinbaum and Finance Minister Rogelio Ramírez de la O have expressed their goal of lowering the deficit to less than 3.5% of GDP in the coming years.
Soni suggested that a consolidation effort targeting a reduction in the deficit to around 4% or 4.5% would be well-received by markets, even if it falls short of the more ambitious goal of 3%.
“A consolidation effort — perhaps not towards 3, but towards 4 or 4.5 percent — would be welcomed by the market,” Soni said, indicating that a measured approach could still reassure investors while maintaining fiscal responsibility.
UBS’s Operations in Mexico
As UBS Group AG continues to expand its presence in Mexico, the bank is optimistic about its growth potential in the country. Following the acquisition of Credit Suisse’s business in Mexico after UBS’s 2023 bailout of its Swiss rival, the bank has focused on enhancing its private banking operations.
Gustavo Galván Duque, head of UBS in Mexico, commented on the integration process, noting that the bank is “moving forward well” in combining the two businesses. This merger has allowed UBS to expand its assets and wealth management client base at a pace that would have otherwise taken several more years to achieve.
Looking Ahead
As 2025 approaches, all eyes will be on how President-elect Claudia Sheinbaum manages the country’s economic and political landscape. Investors will be particularly attuned to any shifts in her policy stance, especially regarding judicial reform, infrastructure investment, and fiscal consolidation. If these areas are addressed effectively, the peso could see a significant rebound, reaffirming Mexico’s appeal as a destination for foreign investment.
With UBS’s bullish outlook on the peso and the potential for improved business conditions, Mexico’s currency could once again find itself among the top performers in the global market. However, the road ahead is not without challenges, as lingering volatility and external factors will continue to influence the peso’s performance in the short term.
