Over the course of 2023, the Mexican peso (MXN) has traded higher and higher against the US dollar (USD). There are several monetary factors driving this shift. But the peso forecast for 2024 is a mixed bag. Analysts and institutions aren’t quite sure where the end of next year will see the MXN peso, but they are agreed on several key factors to watch.
Below we will explore the dynamic of Mexico’s currency viz a viz that of the US and identify key drivers currently at play as well as events to watch in 2024. We will discuss the most likely projections for the strength of the peso and offer insights into the likely course for one of the most popular currency pairs in Latin American financial markets.
MXN v. USD
With the USD as the base, the Mexican peso is often paired up to create the USD/MXN currency pair. This pair is used widely Latin American transactions and worldwide, giving the Mexican peso its highest trading volume in the international foreign exchange market. Because the US dollar is the world reserve currency, it provides strength and stability as a benchmark currency, boosting demand for the peso.
The USD/MXN exchange rate is a measurement of how many pesos the market will trade for one US dollar. In recent years, this exchange rate has hovered around 20 pesos to 1 dollar, but there has been a slide over the course of the past year.
Naturally, fluctuations in the pair’s exchange rate stem from the strength or weakness of the economies in the two respective countries. When the USD/MXN exchange rate rises, meaning more pesos go for one dollar, the dollar is said to be strong and the peso weak. Less pesos for a dollar, or a lower exchange rate, means the opposite – a weak dollar and strong peso.
Why the US Dollar is Weakening
Before exploring the Mexican peso forecast for 2024, let’s analyze the weaking of the US dollar over the course of 2022-23, since USD constitutes one half of this equation.
During 2022, the dollar declined in value against the peso by nearly 7%. This trend has followed into 2023, and appears likely to continue into 2024. A looming recession is a big factor in this weakness. Multiple forecasters have been projecting a US recession within the following year for a few years now. In spite of printing record and multi-decade highs against emerging and developed markets currencies, the demand for the dollar has waned.
Also driving this trend is persistent inflation. Investors seeking exposure to further rate hikes have been averse to buying dollars during a time when the Fed chair has pulled back from increasing interest rates further. It is likely that if the rate of inflation continues to decrease in the US, the dollar will continue to weaken as demand for higher risk will prompt accelerated US dollar outflows.
Factors Driving MXN Peso Strength
Conversely, there are several reasons the peso forecast for 2024 seems more optimistic. As least for the previous two years, these elements have contributed to a gradual but consistent strengthening of the MXN.
In general, Mexico’s economy has demonstrated resilience and stability. Their GDP is growing steadily, rising by 3.3% in October 2023 year over year. This economic vitality is boosted by:
- Export revenues: as an oil producer and exporter, the rise in oil prices has strengthened the economy.
- Trade balance: as oil export revenues exceed import expenditures, the improved trade balance bolsters Mexico’s economy.
- Inflation: while not a benefit in and of itself, inflation leads to increased interest rates, which has strengthened the MXN peso.
- Nearshoring: An influx of foreign direct investment into northern Mexico from US businesses drives up the peso.
Interest rates in particular play a unique role in this disparity between the peso and dollar. The US interest rate is now up to 5.5% while Mexico’s is up to 11.25%. This means it’s better to buy pesos against other less income-bearing currencies, like the dollar.
Over the course of 2023, the peso has increased against the US dollar 12%. And the Bank of Mexico’s report for Q2 2023 forecasts a similar upward trend.
Peso Forecast for 2024 Mixed
Currently the MXN peso is trading at just over 17 to one USD. This is up from the spring of 2020 when the ratio reached nearly 25-to-1. If oil prices continue to rise, interest rates remain high, and Mexico’s economy remains strong, analysts predict a further strengthening of the peso.
Economy Forecast Agency (EFA) specialists believe we will see 15-1 territory in 2024. And the Wallet Investor portal predicts next year will close out around 16-to-1.
However, others are more bearish in their forecasts. BBVA bank’s peso forecast for 2024 puts next year’s rate squarely at 18-to1. Citibanamex analysts project 2024 to close out around 19-to-1. And Commerzbank analyst Esther Reichelt has recently pointed to two factors to justify her forecast of 18-to-1 by the end of 2024:
- Upcoming Mexican elections
- And Mexico’s energy policies
In June, Mexico holds their national election to decide the new leader of the federal government. This holds massive potential for changing things up and infusing uncertainty in the currency markets for the peso. Of the two women most likely to take over in June, one represents a continuation of the current policies, while the other seeks to bring about substantial change.
Regardless of which side wins out, continuing the country’s current policies toward energy could put a damper on nearshoring investment and slow down the peso’s rise. And this could be compounded if Mexico’s central bank starts dropping the interest rate in the near future.
As of right now, there is no agreement on the forecast, but most believe the peso will continue to strengthen, at least through the first half of 2024.
