Mexican Peso Recovers Ground After Four Days of Declines in Latin America

The Mexican peso gained significant respite against the dollar on Wednesday, a day before the release of key inflation data and a crucial monetary policy decision.

This rise occurred in a context where most Latin American assets began to recover lost ground after a sharp sell-off at the beginning of the week. The Mexican currency rose more than 1%, stabilizing after a four-day losing streak and recovering from a nearly two-year low reached on Monday.

As a key beneficiary of yen-financed carry trades, where investors borrow cheaply in the Japanese currency to invest in higher-yielding ones, the peso was one of the hardest hit when yen gains led to the unwinding of many of these transactions. Despite the day's recovery, the peso remains at levels not seen since March 2023.

The peso's resilience is remarkable, as it demonstrated a significant ability to recover quickly after steep declines. This is a key strength in the current economic landscape. In addition, the peso's attractiveness for high-yield investments reinforces its demand and long-term stability, cementing its position as a preferred choice among investors seeking higher yields.

However, this recovery also highlights certain weaknesses. The peso's vulnerability to yen-financed carry trades reflects its susceptibility to fluctuations in global currency markets. Dependence on the international environment becomes critical, as any deterioration in the risk-averse environment can significantly hurt the peso.

Attention now turns to inflation data due for release soon, just ahead of a central bank decision in which the interest rate is expected to hold steady at 11%.

This decision comes amid inflationary pressures and the recent weakness of the peso. Andrés Abadía, chief economist for Latin America at Pantheon Macroeconomics, commented:

"The good news for Mexico is that we expect the U.S. Federal Reserve to cut rates in September, easing pressure on the currency. But as a bellwether for emerging market currencies, any bad news in terms of a risk-averse environment will hurt it."

In this context, several opportunities present themselves. The expected rate cut by the US Federal Reserve could ease pressure on the Mexican currency, providing an opportunity to further strengthen the peso. The central bank's decision to keep the interest rate at 11% could provide greater economic stability and confidence in the Mexican market, which is crucial in these times of global uncertainty.

The MSCI currency index (.MILA00000CUS) also showed signs of recovery, rising to a nearly one-week high. Brazil's real gained 0.7%, reaching a two-week high on the day. Equity benchmarks in Brazil (.BVSP) and Mexico (.MXX) gained 0.4% each, with the MSCI equity index (.MILA00000PUS) also rallying, reaching a nearly one-week high. In contrast, shares of Argentina (.MERV) reversed their initial trend and fell by 0.6%.

However, threats persist. Inflationary pressures in Mexico represent a considerable challenge to economic stability and investor confidence. Moreover, as a bellwether for emerging market currencies, any deterioration in the global risk environment can have a significant negative impact on the peso.

In other markets, the stock market in Colombia was closed for a public holiday. Meanwhile, a nearly 2% drop in copper prices hit Peru's sol, down 0.7%, and kept the Chilean peso flat. Peru's monetary policy decision will be known soon. In July, its central bank kept the interest rate on a second consecutive monthly pause, citing persistent underlying inflation.

Other economic data on investors' radar for the week included inflation data from Chile, Colombia and Brazil, as well as industrial production from Mexico. In addition, El Salvador's sovereign bonds rallied a day after the International Monetary Fund reported that the two sides had made progress in talks toward a fund-supported loan program. Finally, Nigeria's central bank sold $876.26 million at 1.495 naira per dollar in its first retail auction for end-users, firmer than where the currency is traded in the official market.

In conclusion, this outlook reflects a Latin American market in constant adjustment, with the Mexican peso navigating between significant strengths and challenges. The peso's resilience and the central bank's strategic decisions will be crucial in the coming days, especially in a global context of uncertainty and economic fluctuations.

Collaboration: Editorial Auge.