Here’s Why Mexico’s Peso Has Been Surging

Peso Power

The Mexican peso has surged against the U.S. dollar over the past year,making it the best performing major currency in the world, as Mexico’s high interest rates and the peso’s low volatility are attracting investors.

Currencies trade in pairs, so you always compare one against another. Looking at the U.S. dollar, Mexico’s peso has strengthened some 1.5% this year, with one dollar buying around 17 pesos, nearly its strongest showing since 2015.

Let’s put this rally into more context.

Overcoming Obstacles

The peso is gaining steam for a handful of reasons.

Americans feel U.S. interest rates are sky-high, with the federal funds rate currently at 5.25%-5.5%, the highest level in more than two decades. But that’s tame compared to Mexico. Our southern neighbor’s central bank has held interest rates at 11.25% for roughly a year, making the currency particularly attractive for investors engaging in the so-called carry trade, which is used to take advantage of interest rate differentials.

On top of that, as trade tensions with China continue, U.S. companies are looking for manufacturing options closer to home.

Travel Plans?

Although Mexico’s central bank has signaled it may cut rates soon, it’s unclear whether this will be enough to slow the peso’s resilient rally.

This may be good news for investors, but it’s not as great for U.S. tourists, as their dollars will not go as far as they used to south of the border.

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