USD/MXN: Peso to weaken slightly next year – Commerzbank

Mexico's still attractive real interest rate outlook supports continued peso strength. Next year, however, the weakening US economy and political risks are likely to weigh on the Peso. Economists at Commerzbank have adjusted their forecast to reflect these risks.

Continued support from attractive real interest rates

Banxico expects inflation to return to the 3% inflation target towards the end of 2024. Given the decline in inflation, we see room for interest rate cuts towards the end of this year. However, the central bank continues to emphasize the upside risks to inflation, which is why we expect it to maintain an attractive real interest rate even after rate cuts begin. This argues for continued strong MXN levels for the time being.

Developments in the US remain an important risk factor for the Peso. A slowdown in the US economy next year is also likely to weigh on the Mexican outlook and limit upside risks to inflation. In addition, Mexico's ongoing structural problems are likely to come under increasing scrutiny as the country prepares for new elections in July 2024. As a result, we now expect the Peso to weaken slightly next year.

Source: Commerzbank Research