27.03.202613:54:05UTC+00Mexican Peso Drops to Weakest Since December

The Mexican peso slipped beyond 18 per US dollar, its weakest level since early December, as a widening divergence between US and Mexican monetary policy eroded the currency’s long-standing appeal as a carry trade favorite. The move came after the Bank of Mexico unexpectedly resumed its easing cycle, cutting the benchmark rate by 25 basis points to 6.75%, even as headline inflation accelerated to 4.63% in mid-March.

The rate cut was largely a response to softening domestic activity, which preceded an increase in the unemployment rate to 2.6% in February. Global risk sentiment also weighed on the peso, with the US dollar strengthening amid reports that the Pentagon may deploy an additional 10,000 troops to the Middle East and President Trump extended by 10 days a deadline to launch strikes on Iranian energy infrastructure.

At the same time, underemployment at 7.0% and a high level of informal employment at 54.8%, combined with narrowing interest rate differentials, have reduced the peso’s attractiveness. Markets are now pricing in roughly a 50% probability that the Federal Reserve will raise interest rates by December, further challenging the currency’s carry trade status.