FX.co ★ Mexican Peso Gains Ground

The Mexican peso appreciated towards 18.35 per US dollar, influenced by expectations of a dovish stance from the US Federal Reserve. Recent Fed statements and softer US economic data have led market participants to predict an 80% probability of a 25 basis points rate cut in December. Domestically, Mexico's monetary policy remains relatively supportive, despite an easing cycle. In early November, Banxico reduced the policy rate by 25 basis points to 7.25%, maintaining a cautious and data-driven outlook to ensure a significant yield advantage for peso assets. This yield cushion has attracted carry-trade flows, despite economic challenges, such as a 0.3% contraction in Q3 GDP and a notable decline in manufacturing activity. These conditions could potentially reduce the interest rate differential if economic weakness intensifies. As a result, traders are weighing the impact of a weaker US dollar and favorable carry trades against deteriorating growth metrics and a more cautious approach to further rate cuts.