Looking at the domestic fundamentals, it's hard to find any justification for the Mexican currency's recent movements. The most recent GDP data showed that the Mexican economy continued to grow rapidly in the second quarter, while inflation continues to slow down - as the August data showed.
This means that the recent devaluation of the Mexican Peso is much more closely linked to the external context of the dollar's appreciation, especially against Latin American currencies - which tend to suffer more from China's economic slowdown.
The performance of the Mexican economy in 2023 is admirable, especially considering the global scenario of high interest rates and economic slowdown. Domestic demand remains robust, even in the face of restrictive fiscal and monetary conditions, as well as negative sentiment towards some government policies.
The economy has benefited from increased employment, rising wages, high remittances and positive consumer confidence. Investment is benefiting as Mexico attracts more capital inflows: the country has been one of the biggest beneficiaries of the relocation of global supply chains, given its proximity to the US. In July, for the first time in over 20 years, Mexico overtook China as the main exporter to the US.
Another point that favors the Mexican economy's macroeconomic scenario is the "homogeneity" of its growth. Both manufacturing and services have shown robust growth, which makes economic performance less dependent on specific sectors.
As Mexican economic data is coming in above the Mexican central bank's forecasts, signaling growth above potential, the likelihood of interest rate cuts this year is reduced. Consequently, the interest rate differential is likely to remain high, favoring the Mexican peso.
