Investing.com – Although the Chinese yuan exceeded 16.90 units against the US dollar for the first time this year on Friday, January 5, analysts at Intercam Banco believe that the local currency will continue to rise. This will lead to “slight depreciation” throughout 2024, accompanied by periods of volatility.
“By 2024, we expect the peso to depreciate slightly to a level of 17.79 pesos per dollar, or a depreciation of 5.2%,” said a team of economic analysts at Intercam, led by Alejandra Marcos.
The financial institution predicts that the exchange rate will be 16.81 units at the end of the first quarter; it will rebound to 17.96 in the second quarter. They expect it to rise to 18.10 by the end of the third quarter and fall to 17.79 by the end of the year.
Analysts say this will happen after 2023, with the exchange rate closing at 16.97 pesos to the dollar, which would mean an appreciation of 2.43% compared to November 2023 and 14.89% compared to the end of 2022.
“Within a basket of emerging currencies, the Mexican peso has the second-highest appreciation against the U.S. dollar, behind the Colombian peso,” they explained in their analysis.
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What could put pressure on the Mexican peso?
Intercam’s team of analysts has observed 5 factors that could put upward pressure on the exchange rate as the Mexican peso depreciates:
- Global monetary policy has likely ended its upcycle, with interest rate cuts or reductions now expected across economies. For Mexico, they expect at least four non-consecutive interest rate cuts this year, starting in the first quarter and ending the year by 10.25%. For the Federal Reserve (Fed), they expect interest rates to fall by 100 basis points by the end of 2024, with a range of 4.25% to 4.50%.
- As interest rates fall, the term premium is likely to fall and force the peso to depreciate.
- The current account reflects an economy’s savings minus investment, and a current account deficit is caused by a fall in savings or a rebound in investment. “We believe Mexico is in the second scenario due to its nearshoring situation”; they note.
- Risks of lower raw material (mainly oil) prices due to dim outlook for global economic growth and China
- Elections in Mexico and the United States could trigger volatility.
“Historically, in Mexico’s last four presidential elections, the exchange rate depreciated before the election and then appreciated, albeit to a lesser extent. In the case of the United States, what is telling is that today’s Republican leader (Trump) volatility again in the face of damaging public policies on immigration, drug trafficking controls and even some trade disputes,” they mentioned.
Will the dollar weaken?
While analysts expect dollar prices to rise in foreign exchange markets, they also predict that the cycle of dollar weakness could continue into this year as U.S. interest rates fall due to the Federal Reserve’s planned rate cuts.
“In addition, it is possible that Mexico will start to receive capital investment as funding will remain high despite our expectation of interest rate cuts from the Bank of Mexico,” they said.
They also stressed that the strength of the Mexican peso may continue to be supported in the coming months if capital flows into the country accelerate.
At around 2:00 pm Mexico City time, the exchange rate of the U.S. dollar against the Mexican peso was quoted at 16.88 units, with a daily appreciation of 0.73% and a cumulative increase of 0.38% in the first week. That year.
If the trading day ends at this level, the national currency will record its best closing price since August 30, 2023, when the exchange rate reached 16.72 pesos against the US dollar.