Mexico’s peso – rising from the ashes?

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In January, when Mexico’s peso breached 22 to the dollar, it looked like there was no going back to its pre-US election level of 18.3 pesos.

Fast forward to today: the peso is below 19 again, spurred by comments to Bloomberg from Agustín Carstens, the central bank governor, that the peso is still undervalued by “no more than 10 per cent”.

It was trading around 18.95 on Thursday after earlier firming to 18.93. The peso has rallied more than 9 per cent this year and is the second-best major currency performer behind the South African rand.

The peso has been in the firing line because of concern over the Nafta trade deal, which President Donald Trump has said he could scrap unless he could secure a better deal for Americans. But more conciliatory comments out of Washington in recent weeks have fuelled optimism that a disastrous outcome for Mexico will be averted.

Mr Carstens, who is attending an annual Mexican bankers’ conference, also said on Wednesday that the peso’s recovery should help lower inflation towards the bank’s target of 3 per cent, plus or minus one point – a goal he hopes will be achieved by the end of next year. Inflation in the first half of March hit 5.29 per cent, a nearly 8-year high.

Mexico has begun a currency hedging programme, which has helped stabilise the peso and is expected to deliver another 25 per cent increase in its key lending rate on March 30.

The rate is already at its highest level since March 2009.

“As the Central Bank emphasises inflationary pressures above concerns over economic growth, we expect the tightening cycle to continue at a moderate pace, with the overnight rate reaching over 7.00 per cent by year end,” Moody’s Investors Service said in a report published earlier. It added: “Higher rates will further weigh on the country’s already lackluster economic prospects.”

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