Traders See Banxico Easing To Trim The Peso And Help Exports

What happened to the peso

In early September, Mexico's currency climbed to a high not seen in over two years, a rally that started to pinch exporters and tourism. Since then it has slumped almost 9%, a slide that ranks as the second worst out of 31 large currencies Bloomberg follows.

Momentum turned after Banxico signaled in September it was open to lowering rates, then surprised forecasters by trimming borrowing costs by 0.25 percentage point last week. Cutting while the Federal Reserve is still hiking undercuts the appeal of the carry trade - borrowing in a lower yielding currency like the dollar and parking the cash in higher yielding pesos. The gap with the Fed is at multi year lows, and a hotter US inflation print this week further firmed bets on another Fed move in December.

Why traders think Banxico wants a weaker peso

Some investors now read Banxico's stance as favoring a cheaper currency to support growth. Carlos Capistran, who runs Latin America and Canada economics research at Bank of America, said many clients think the cut was "not necessarily aimed at the 3% inflation target," with discussions centering on "other potential motivations: a weaker peso to support growth, lower financing costs for the government, or both." Bank of America expects the peso around 19 per dollar next year.

Wells Fargo Securities strategist Alvaro Vivanco called the November move "tactical," writing on Nov. 6 that "Currency strength was both a reason and a justification for Banxico to adopt a dovish stance, particularly against a backdrop of ongoing Fed hikes." He argued that could be the right call given a tougher export backdrop.

Not everyone sees an explicit push to cheapen the currency. São Paulo based economist Marco Oviedo views the approach as aimed at avoiding "excessive overvaluation." He said earlier peso strength gave policymakers room to ease without large risks, despite the patchy behavior of underlying inflation. "Implicitly, it seems that they would like to not see a strong peso, given the level of inflation," he said. "The objective of getting rid of the 'super peso' for now is being attained."

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Banxico Governor Victoria Rodríguez said policymakers do not target a specific exchange rate. In a recent Bloomberg News interview she noted the peso "remains below its 2025 average, and the recent adjustment followed a period of significant appreciation. So far, the move has been orderly, and we will continue to monitor it." A Banxico representative did not reply to follow-up questions for more details.

Market moves and what drove them

Mexico's inflation accelerated, with consumer prices rising 3.75% in October compared with the same month a year earlier, adding pressure to last week's decision. Growth also accelerated in the third quarter, reaching its quickest pace since 2023, helped by strong exports, even as a stronger currency tends to erode price competitiveness for exporters and tourism and is a serious headache for domestic firms.

Positioning flipped hard. Asset managers built the largest net short on the peso in 20 years after Banxico signaled it would diverge from the Fed's cycle, according to Commodity Futures Trading Commission data through Nov. 4, 2026. JPMorgan Chase and Citigroup dropped their long standing overweight recommendations.

It was not only Banxico. Global risk appetite wobbled in late October amid concerns around the artificial intelligence trade, pulling down the peso and other Latin American currencies. A broad Democratic win in the US midterms helped those currencies claw back a bit.

What investors are watching next and what it means for your portfolio

Minutes from Banxico's latest meeting arrive Thursday. Markets are focused on Banxico's stance relative to the Fed, and on where US rates ultimately top out. Investors see the Fed's terminal rate sitting 0.85 percentage point above today's level by next September, said Simon Quijano-Evans of Macro Hive, where he leads strategy. He added that Banxico has signaled it is in no hurry to cut again and that its recent steps "do seem to point in the direction of them actually wanting a depreciation of the peso, even if they do not say so explicitly."

In plain English: the rate gap matters for returns. With the peso around 18.60 and Bank of America penciling in 19 per dollar next year, the balance between Mexican and dollar assets is shifting. Positioning and bank calls have already moved, so if your exposure touches Mexico's currency, exporters, or tourism, expect the peso to stay under the microscope.

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