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Mexican peso gains after central bank raises rates

The Mexican peso hit its highest level since the day after Donald Trump’s election after Mexico’s central bank raised interest rates this week.

Banxico delivered a quarter-point rate rise in line with market expectations, taking its key lending rate to 6.5 per cent to maintain the fight against rising inflation.

“Since the last monetary policy decision, the conditions in national financial markets improved significantly,” Banxico said in a statement, though it acknowledged external uncertainty remained.

The peso rallied in anticipation of the central bank action and it has been the best performing main currency against the US dollar this year, with an overall gain of 11 per cent.

The currency began the year around 22 pesos to the dollar and has appreciated towards 18.60 pesos. That represents the strongest level for the peso since November 9, as currency traders have played down concerns over trade protectionism from the Trump administration.

However, one investor said Banxico’s motivation for tighter policy might have less to do with inflation and more to do with ensuring that the flow of investment capital did not dry up. “You can deal with inflation later; liquidity is more complex,” he said.

Banxico has delivered six half-point increases in just over a year, and the result, said Luis Arcentales at Morgan Stanley, is that “the peso no longer stands out within the emerging-market space as a cheap ‘proxy hedge’”.

Carlos Capistrán at Bank of America Merrill Lynch agreed with Mr Arcentales that the rate raising cycle was nearing its end.

Mr Arcentales said Banxico should “leave the door open for further tightening” because inflation is still tracking upwards, and further volatility — sparked, perhaps, by the upcoming renegotiation of the North American Free Trade Agreement — could not be ruled out.