Is the Mexican peso expected to devalue in 2024? 5 reasons for this forecast From Investing.com

Investing.com – Although it managed to regain its position against the US dollar this Friday, January 5, and the exchange rate surpassed 16.90 units for the first time in a year, Intercam Banco analysts see that the national currency will rise. will result in a “small depreciation” throughout 2024, with periods of volatility.

“By 2024, we estimate that the peso will depreciate slightly to 17.79 pesos per dollar, a depreciation of 5.2%,” said Intercam, a group of economic analysts led by Alejandra Marcos.

The forecasts of this financial institution indicate that at the end of the first quarter the rate will be at the level of 16.81 units; In the second quarter it will recover to 17.96. They expect it to rise to 18.10 by the end of the third quarter before falling to 17.79 at the end of the year.

Analysts say this will happen after the exchange rate closes at 16.97 pesos per dollar in 2023, marking a 2.43% appreciation from November 2023 and a 14.89% appreciation from by the end of 2022.

“Across a basket of emerging currencies, the Mexican peso’s appreciation ranked second behind the Colombian peso against the dollar,” they explain in their analysis.

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What could put pressure on the Mexican peso?

Intercam’s team of analysts notes 5 factors that could put upward pressure on the exchange rate as a result of the depreciation of the Mexican peso:

1. It is very likely that global monetary policy has completed the expansionary cycle and they are now looking at cuts or downward adjustments in various economies. In Mexico, they forecast at least four non-consecutive contractions this year, starting in the first quarter and ending the year at 10.25%. As for the Federal Reserve (Fed), they expect a decline of 100 basis points by the end of 2024 in a range of 4.25 to 4.50%.
2. With rates falling, term premiums could ease pressure and put pressure on the peso, causing depreciation.
3. The current account reflects saving minus investment in an economy, where the current account deficit is caused by a fall in savings or a rebound in investment. “We believe that Mexico is in the second situation due to the coastal situation”; they pointed out.
4. Downside risks to commodity prices, mainly oil, due to lower global and Chinese growth forecasts
5. Elections in Mexico and the US, which could trigger episodes of instability.

“Historically, in the last four presidential elections in Mexico, the exchange rate has depreciated before the election and then appreciated, although to a lesser extent. In the case of the United States, it can be explained that whoever is the leader of the Republicans today (Trump) is again generating episodes of instability in the face of destructive government policies regarding migration, drug control and even some trade. disputes,” they noted.

Will the dollar weaken?

While analysts see the dollar rising in the foreign exchange market, they also predict that the cycle of dollar weakness could continue this year, helped by US rate cuts in light of the Federal Reserve’s planned cuts.

“In addition, it is possible that Mexico will begin to receive capital investment, since, despite the rate cuts we expect, financing from Banxico will remain at a high level,” they said.

They also highlight that if capital inflows into the country accelerate, the strength of the Mexican peso could continue to be supported in the coming months.

Around 2:00 p.m. Mexico City time, the dollar-to-Mexican peso exchange rate stood at 16.88 units, with the local currency registering a daily gain of 0.73% and accumulating a gain of 0.38% in the first week. year.

If the session ends at this level, the domestic currency will record its best close since August 30, 2023, when the exchange rate reached 16.72 pesos per dollar.