The Mexican peso experienced its best day in over two weeks on Thursday, bolstered by the weakening U.S. dollar as macroeconomic data from the United States signaled that the Federal Reserve (Fed) could begin reducing the cost of credit next week. The peso registered a gain of 1.62%, or 32.11 cents, closing at 19.4724 pesos per U.S. dollar, marking its strongest level since August 26.
The peso’s surge comes in the context of significant international economic developments. The European Central Bank (ECB) announced a 0.25% cut in interest rates, bringing them to 3.5%, the lowest level since June 2023. Meanwhile, in the U.S., producer price inflation exceeded expectations but continued its downward trajectory, contributing to the weakening of the dollar.
In Mexico, the peso initially opened slightly weaker against the dollar, but judicial reforms passed by at least 18 local congresses helped buoy domestic confidence. According to data from the Bank of Mexico, the peso traded within a range of 19.6800 at its highest and 19.4660 at its lowest on Thursday. Among emerging market currencies, the peso was the second most appreciated, trailing only the Russian ruble, according to data from financial services provider Base.
Despite this rally, the peso has depreciated by 14% so far this year, placing it as the third worst-performing currency among a basket of emerging markets.
Market Analysts Predict Peso Support at 19.5
Analysts point to the weakening of the U.S. dollar as a key factor behind the peso’s recent strength. Revised down readings of the U.S. Producer Price Index (PPI) for August—though September’s figures exceeded expectations—suggest that inflationary pressures in the U.S. are easing, paving the way for an anticipated interest rate cut by the Federal Reserve. Alexander Londoño, an analyst at ActivTrades, noted that the Fed is widely expected to reduce rates by at least 0.25 percentage points in the coming week, which is adding pressure to the dollar.
The Mexican peso, which retreated from a high of 20.13 to approach 19.5 pesos per dollar, may find support at this level, according to Londoño. Despite the peso’s recent gains, analysts still see the currency maintaining an upward trend in the medium term.
The U.S. dollar’s overall weakness was evident across global markets, with the weighted index measuring the dollar’s performance against a basket of six major currencies falling by 0.42% to 101.230.
Mexican Stock Exchange Achieves Best Performance in Two Months
The gains in the peso coincided with a strong performance by the Mexican Stock Exchange (BMV). On Thursday, the BMV saw its largest single-day gain since July 10, with a 1.57% rise, translating into an increase of 803.97 points, closing the day at 51,999.73.
The stock market rally was driven by strong performances from several key stocks, including Inbursa (up 3.80%), Traxión (3.73%), Banorte (3.62%), Bajío (3.25%), América Móvil (1.50%), Asur (2.26%), and Bimbo (2.40%). These gains reflect a broad improvement in market sentiment and a stronger appetite for risk among investors.
Inflation and Employment Data Point to Fed Rate Cut
The U.S. Bureau of Labor Statistics (BLS) released the latest Producer Price Index (PPI) data for August, showing a monthly variation of 0.2%, slightly higher than market expectations of 0.1% and the previous month’s 0% reading. On an annual basis, producer price inflation stood at 1.7%, down from the previous 2.1%, while core PPI inflation (excluding food and energy) increased marginally to 3.3%, from 3.2%.
The higher-than-expected rise in U.S. producer prices was largely attributed to increased service costs, but analysts from Intercam noted that the overall trend remains consistent with declining inflation. The Fed is expected to take this data into account at its upcoming policy meeting, with a growing consensus that the central bank will begin easing its monetary stance.
In another key economic indicator, the number of initial claims for unemployment insurance in the U.S. rose slightly to 230,000 in the week ending September 7, up by 2,000 from the previous week. This data further supports the case for a reduction in the Fed’s federal funds rate, potentially signaling the start of a less restrictive monetary policy.
Global Markets Respond to Economic Data
The prospect of a Fed rate cut has spurred a surge in risk appetite across global financial markets. On Wall Street, major indices posted gains, with the S&P 500 rising by 0.75% to 5,595.76 points, the Dow Jones up 0.58% to 41,967, and the Nasdaq climbing 1.02% to 17,572.43.
Commodities also benefitted from the dollar’s weakness and the general optimism surrounding potential interest rate cuts. Brent crude oil prices increased by 1.97% to $71.97 per barrel, while West Texas Intermediate (WTI) crude saw a 2.47% jump, closing at $68.97 per barrel.
The Mexican peso’s rally on Thursday reflects the broader trend of dollar weakness and shifting global economic conditions. With the Federal Reserve expected to announce a rate cut next week, the peso could continue to strengthen in the short term, although long-term challenges remain for the Mexican currency, which has experienced significant depreciation this year. Additionally, the performance of the Mexican Stock Exchange and global markets highlights the growing optimism among investors as they anticipate a more accommodative monetary policy from the Fed.
